THE 

ARTHUR  YOUNG 

ACCOUNTING 

COLLECTION 


Graduate  School  of 
Business  Administration 

Librar)^  of  the 

University  of  CaUfomia 

Los  Angeles 


This  book  is  Pt^t?.  on  ♦h*'  last  date  stamped  b^ 


SOUTHERN  BRANCH, 

UNIVERSITY  Q5  CALIFORNIA, 

LIBR7\RY, 

pJp^/NGELES,  CALIF. 


Library 

G^raduate  School  of  Business  Admlftlsstr&tiOBf 

University  of  California 

Los  Angeles  24,  California 


COST   ACCOUNTING 
TO  AID  PRODUCTION 


A    PRACTICAL    STUDY    OF 
SCIENTIFIC   COST  ACCOUNTING 


BY 

G.   CHARTER    HARRISON 

Associate-member  of  the  American  Society  of  Mechanical 

Engineers,  Associate  of  the  Institute  of  Chartered 

Accountants,   Consulting  Accountant 


NEW  YORK 

THE  ENGINEERING  MAGAZINE  COMPANY 

1921 

400  74 


Copyright  1921,  by 
THE  ENGINEERING  MAGAZINE  COMPANY 


PRESS   OF 

BRAUNWORTH    &    CO. 

BOOK    MANUFACTURERS 

BROOKLYN,    N.   Y. 


Bua.  Admint 
Library 


FOREWORD 


T' 


HINKING,  as  a  power  to  achieve  actual  results,  was  never 
more  strikingly  forced  upon  the  attention  of  peoples  than 
f  during  the  past  years  of  war.  The  care  with  which  military 
?  commanders   fostered  the  morale  of  their  men,  and  the  great 

efforts   made   by   political    leaders   to   mold    and   direct   public 
«*         opinion,  will  always  be  remembered  by  those  who  watched  and 
S         studied  the  progress  of  that  great  conflict.     In  contrast,  enemy 
t)         nations  sought  to  implant  their  own  ideas,  wishes,  and  points 
of  view,  as  one  of  the  potent  weapons  of  warfare.     The  process 
thus  used  in  attempting  to  influence  men's  minds,  and  thus  their 
_         actions,    we    call    propagandizing,     and    the    letters,    articles, 
^         pamphlets,  books,  and  posters  propaganda.     Unfortunately  how- 
ever a  sinister  meaning  has  come  to  be  attached  to  these  terms, 
y        but  nevertheless  men  of  progressive  thinking  have  always  tried 
^        to  tell  and  show  to  others  their  ideas  and  convictions  and  so 
^        exert  an  influence   over  their  actions.     All  of  this  is  normal 
^       and  commendable.    It  is  the  abuse  of  this  process,  its  perversion 
V)        to  ignoble  or  wrong  purposes,  that  should  be  condemned,  and 
it  is  therefore,  sincere  commendation  to  refer  to  the  work  of 
Mr.  G.  Charter  Harrison  as  propaganda  in  the  great  field  of 
productive  industry. 

Many  of  the  early  efforts  at  industrial  management  were 
inspired  by  the  needs  of  the  accounting  function  of  a  manu- 
facturing business.  It  was  realized  that  a  knowledge  of  costs 
was  essential  in  meeting  competition  and  in  making  sure  that 
the  business  was  stable.  So,  many  of  the  attempts  at  bettering 
industrial  organization  and  management  sprang  out  of  an  effort 
to  secure  accurate  costs.  But.  generally  speaking,  professional 
accountants  seem  to  have  failed  to  fit  their  own  work  into  the 
broad  scheme  of  productive  industry.  And  this  has  been  per- 
mitted in  spite  of  the  teachings  of  many  of  the  engineers  who 
first  entered  the  industrial  field  and  who  were  compelled  to 
develop  cost   accounting   as   one   branch   of   their   own   work. 

iii 


IV 

Notably,  Frederick  W.  Taylor  and  Harrington  Emerson 
developed  cost  work,  and  wrote  emphasizing  the  place  of  im- 
portance that  costs  occupy  in  the  general  scheme  of  management 
in  industry. 

During  the  past  decade  there  has  been  a  gradual  widening 
of  the  divergence  of  viewpoint  between  many  of  the  leaders 
in  management  and  engineering  and  cost  accounting.  The 
engineers  have  been  working  under  tremendous  pressure.  Pro- 
duction has  been  the  keynote  of  all  their  efforts  and  the  demand 
for  goods  has  been  insistent  and  insatiable.  Under  these  cir- 
cumstances it  has  been  quite  natural  to  reach  out  for  every 
possible  help  to  increase  and  improve  the  productive  process. 
So  engineers  have  wanted  cost  accounting  methods  that  would 
aid  in  reaching  toward  the  great  objective  of  industry. 

In  contrast,  the  cost  accountants  have  seemed  to  be  solely 
interested  in  securing  accurate,  refined  cost  history  of  what  has 
actually  taken  place  in  the  processes  and  operations  of  produc- 
tion. In  the  midst  of  this  separation  of  viewpoints,  this  lack 
of  harmony  between  men  with  objective  and  subjective  minds, 
came  the  writing  and  work  of  a  chartered  accountant,  with  some 
twenty  years  of  professional  experience  of  which  some  fourteen 
years  have  been  spent  in  the  United  States  and  who  boldly 
supports  the  point  of  view  of  the  engineers.  Mr.  Harrison 
recognized  that  the  objective  of  industry  is  the  production  of 
goods,  that  everything  that  hampered  the  productive  process 
should  be  eliminated,  that  impatience  with  a  factory  system  or 
detail  that  hindered,  or  at  least  did  not  help,  production  was 
natural,  and  that  cost  accounting,  instead  of  being  static  in 
accumulating  history,  should  be  an  active  part  of  the  great 
process  of  production.  Fearlessly  thinking  and  writing,  he  con- 
demned the  attitude  of  many  of  his  fellow  accountants,  telling 
them  that  their  practice  was  twenty-five  years  behind  the  times, 
that  they  were  making  themselves  slavishly  subservient  to  a 
financial  condition  in  industry  that  m.ust  pass  away,  and  declared 
to  them  that  if  cost  accounting  was  to  hold  its  own  among  the 
business  professions,  it  must  turn  over  a  new  leaf  and  prepare 
to  serve  in  "The  New  Industrial  Day." 

Looking  through  the  form  and  semblance  of  things  he 
declared,  further,  that  cost  accounting  was  unworthy  of  any 
place  in  industry  if  it  did  not  contribute  to  production,  and,  not 
content  with  stopping  at  this  point,  he  re-enforced  his  challenge 
by  pointing  out  better  and  improved  methods,  by  showing  the 
way  in  which  cost  accounting  could  become  an  aid  to  production. 


In  all  this  work  he  has  endeavored  to  stimulate  and  arouse 
the  thinking  of  men,  realizing  that  as  the  years  pass  greater 
progress  can  be  secured  by  this  means  than  by  working  for  the 
adoption  of  any  particular  accounting  scheme  or  plan. 

In  a  series  of  articles  published  in  Industrial  Management  in 
1918  and  19 19,  he  developed  the  advantages,  in  fact  the  neces- 
sity, of  predetermined  costs.  Then  he  showed  how  to  establish 
cost  standards  and  use  them  to  control  costs  in  the  making. 
And,  he  developed  the  theory  of  standardized  cost  formulas 
and  presented  a  number  of  these  arranged  in  such  a  manner 
that  the  little  skilled  office  employee  would  be  able  to  w^ork  out 
accurate  results  in  carrying  forward  a  cost  accounting  system 
based  on  the  determination  of  standard  costs  and  the  comparison 
of  actual  costs  with  these  standards. 

All  of  this  work  has  the  touch  of  stern  reality,  for  jMr.  Har- 
rison has  applied  these  methods  in  his  own  consulting  practice 
and  in  widely  different  Industries,  so  far  apart  as  the  tonnage 
production  of  steel  and  the  building  of  complex,  agricultural 
machinery. 

From  this  fearless  thinking,  from  this  willingness  to  write 
boldly  of  the  truth  as  he  sees  it,  from  this  earnest  desire  to 
advance  his  own  profession  of  cost  accounting  and  to  assist  in 
the  up-building  of  productive  industry,  Mr.  Harrison  has  written 
his  book,  "Cost  Accounting  to  Aid  Production."  Its  purpose 
is  avowedly  to  provoke  the  thinking  of  others,  in  this  respect 
differing  from  practically  all  of  the  preceding  literature  on  cost 
accounting.  Two  features  of  the  method  of  treatment  add 
interest  and  charm.  Generous  credit  is  given  to  engineers  who 
have  written  on  cost-accounting  topics,  even  although  they  may 
have  condemned  much  that  is  looked  upon  as  accepted  in  cost- 
accounting  practice.  The  other  attractive  feature  is  the  frequent 
and  generous  references  to  philosophic  writings,  showing  that 
the  principles  underlying  cost  accounting  can  be  interpreted  in 
terms  of  those  things  that  we  recognize  as  the  very  truths  of 
life.  Far  too  few  technical  and  engineering  authors  permit 
themselves  to  depart  from  the  narrow  limits  of  their  topics, 
and  in  exercising  this  restraint  they  fail  to  make  their  own  work 
conform  to  the  great  concepts  of  truth  that  are  the  heritage 
of  all. 

No  reader  will  be  able  to  lay  down  this  book  without  feeling 
anew  the  essential  responsibility  of  industry  In  present  day 
human  life,  nor  without  a  renewed  realization  that  every  part 
of  the  great  professions,  which  are  working  for  the  carrying 


VI 

on  of  productive  industry,  is  but  a  section  of  a  great  whole 
and  must  be  united  in  the  closest  of  harmonious  cooperation 
with  all  the  others,  else  much  less  than  the  best  will  be  achieved. 
It  is  easy  to  suspect  that  it  was  one  of  Mr.  Harrison's  wishes 
to  leave  some  such  impression  upon  the  minds  of  those  who 
are  fortunate  enough  to  pick  up  and  read  through  what  he 
has  written. 

L.  P.  Alford. 
New  York,  N.  Y., 
August,   1920. 


INTRODUCTION 


TN  a  number  of  articles  appearing  in  Industrial  Management 
-*-  between  October,  1918  and  March,  1920,  which  have  been 
revised  and  elaborated  to  form  the  present  volume,  the  author 
presented  a  serious  and  far-reaching  indictment  of  the  com- 
monly accepted  methods  of  cost  accounting.  In  these  articles 
he  claimed  that  the  methods  of  cost  accounting,  which  are 
taught  in  what  are  regarded  as  the  standard  works  on  this 
subject,  are  incorrect  in  principle,  unscientific,  inaccurate,  and 
inadequate,  in  brief,  absolutely  unsuitable  to  meet  the  needs  of 
modern  business. 

The  author  does  not  claim  however  to  be  the  first  to  disclose 
the  fundamental  defects  underlying  the  established  methods  of 
cost  accounting.  Ten  years  ago  in  the  pages  of  Industrial 
Management  Mr.  Harrington  Emerson  presented  a  clear  and 
convincing  indictment  of  the  usual  retrospective  cost  accounting 
methods  and  other  writers  since  that  time,  notably  the  late  Mr. 
H.  L.  Gantt,  have  forcibly  demonstrated  the  shortcomings  of 
the  average  cost  system  to  meet  the  needs  of  industry.  Such 
criticisms  as  have  been  made  however  have  emanated  from  the 
engineering  and  not  the  accounting  profession  and  while  the 
critics  have  generally  displayed  a  very  complete  understanding 
of  the  defects  in  cost  accounting  methods,  practical  advice  as 
to  the  solution  of  the  accounting  problems  involved  in  the  cor- 
rection of  these  defects  has  been  notably  lacking. 

In  his  efforts  towards  the  bringing  of  cost  methods  into  line 
with  modern  industrial  thought  the  author  had  the  distinct 
advantage  of  possessing  an  extensive  experience  in  professional 
accounting  work  combined  with  a  fairly  intimate  acquaintance 
with  the  problems  of  manufacturing,  the  latter  being  gained  in 
part  through  his  activities  as  comptroller  of  a  large  manufac- 
turing business,  as  the  head  of  the  system  division  of  one  of 
the  leading  firms  of  professional  accountants,  and  for  a  number 
of  years  as  a  consulting  accountant. 

vii 


Vlll 

The  methods  formulated  by  the  author  and  described  in  the 
following  pages  represent  an  absolute  revolution  in  the  basic 
conception  of  the  functions  of  a  cost  system — whereas  the  com- 
mon idea  of  costs  is  confined  to  the  compilation  of  information 
as  to  past  events,  under  the  author's  methods  all  costs  are  pre- 
determined. These  methods  represent  the  application  of  the 
scientific  management  idea  in  cost  accounting — not  the  restricted 
and  far  too  common  idea  of  scientific  management  which  con- 
siders this  as  being  merely  a  system  of  shop  management  but 
the  broader  conception  which  regards  scientific  management  as 
representing  the  fundamental  change  in  the  viewpoint  of  indus- 
try from  that  of  retrospection  to  prospection. 

In  the  opening  chapter  the  author  states  that  "it  is  probable 
that  the  average  cost  system,  taking  into  account  all  factors, 
is  not  more  than  50  per  cent  efficient,  so  that  the  annual  loss 
from  this  cause  may  well  be  regarded  as  a  matter  of  consider- 
able importance."  That  this  statement  is  a  highly  conserva- 
tive one  will  hardly  be  disputed  by  those  best  in  a  position  to 
judge  and,  surely,  if  one  half  of  the  money  annually  spent  in 
cost  accounting  is  to  be  regarded  as  a  preventable  waste,  the 
amount  involved  represents  a  serious  drain  upon  industrial  life. 
But  this  direct  loss  is  trifling  compared  with  the  indirect  one 
resulting  from  the  fact  that  the  average  cost  system  does  not 
disclose  inefficiencies  which  therefore  remain  uncorrected  owing 
to  ignorance  of  their  existence. 

Cost  accounting  at  the  present  time  occupies  an  anomalous 
position.  On  the  one  hand  there  is  the  engineering  profession, 
which  knows  what  is  required  but  does  not  understand  account- 
ing technique,  claiming  that  cost  accounting  is  out  of  tune  with 
industrial  effort,  and  on  the  other  hand  there  is  the  accounting 
profession,  trained  in  the  development  of  accounting  mechanism, 
but  apparently  indifferent  to  the  fact  that  in  clinging  to  obsolete 
ideas  it  is  a  brake  on  the  wheels  of  industry.  One  has  only 
to  read  the  cost  accounting  literature  of  the  last  few  years  to 
realize  that  most  of  it  is  merely  a  rehash  of  old  ideas,  and  that 
the  writers  have  not  appreciated  that  revolutionary  changes  in 
industrial  methods  demand  corresponding  changes  in  cost 
accounting.  Useful  in  many  ways  as  are  the  habits  of  thought 
resulting  from  the  training  of  professional  men  along  standard- 
ized lines,  there  is  the  danger  that  thinking  will  become  more 
or  less  stereotyped  and  a  condition  of  mental  inertia  result. 

History  is  full  of  instances  of  the  positive  refusal  of  the 
human  mind  to  travel  along  a  different  line  to  that  in  which 


IX 


it  has  been  accustomed  to  follow.  About  a  century  and  a  half 
before  the  birth  of  Christ,  Ptolemy  expounded  his  theory  of 
the  order  of  the  universe.  According  to  this  theory  the  earth 
was  the  center  of  the  universe,  around  which  the  sphere  of  the 
heavens  revolved  from  east  to  west,  carrying  all  celestial  objects 
with  it  once  every  twenty-four  hours.  This  was  regarded  as  an 
eminently  satisfactory  doctrine,  for  obviously  the  idea  that  they 
were  situated  at  the  very  hub  of  the  universe,  so  to  speak,  was 
pleasing  to  the  people  of  those  days  and  further  was  not  the 
theory  proven  by  the  evidence  of  their  own  eyes?  Did  not 
they  see  the  sun  every  morning  make  its  appearance  in  the  east 
and  slowly  travel  towards  the  west? 

About  1500  years  after  Ptolemy's  time,  however,  there  came 
into  the  world  one  of  those  inquiring  souls  who  do  not  take 
things  for  granted.  Copernicus,  the  father  of  modern  astron- 
omy, announced  to  an  unbelieving  world  that  the  ideas  advanced 
by  Ptolemy  were  all  wrong;  that  the  world  was  not  the  center 
of  the  universe ;  that  the  sun  did  not  revolve  around  it  and  that 
the  apparent  movement  of  this  luminary  across  the  horizon  was 
due  to  the  revolution  of  the  world  upon  its  own  axis.  This 
discovery  did  not  receive  an  enthusiastic  reception  for  obviously, 
it  was  not  easy  to  eradicate  an  idea  which  had  been  fixed  for 
1500  years,  and  for  nearly  150  years  after  Copernicus  published 
his  great  work  on  the  revolution  of  the  celestial  bodies  it  was 
kept  on  the  index  of  prohibited  books  of  a  great  church  as  being 
subversive  of  the  truth. 

It  is  easy,  of  course,  to  understand  how  the  rank  and  file 
of  mankind  would  find  it  difficult  not  only  to  totally  reverse 
a  conception  current  for  centuries  but  also  to  accept  a  theory 
which  was  contrary  to  what  their  own  observations  would  lead 
them  to  believe,  but  the  significant  fact  is  that  those  who  should 
have  been  in  a  position  to  fully  appreciate  the  arguments  of 
Copernicus  held  so  tenaciously  to  their  old  ideas  that  over 
seventy  years  after  Copernicus  advanced  his  theories  they  were 
pronounced  by  a  body  of  learned  men  as  being  ''absurd  in 
philosophy." 

As  a  matter  of  fact,  however,  it  is  not  surprising  that  the 
strongest  opposition  to  the  acceptance  of  any  revolutionary  idea 
should  often  come  from  the  ranks  of  specialists  in  the  particular 
field  of  thought  affected.  The  learned  men  who  denounced  the 
theories  of  Copernicus  doubtless  honestly  believed  that  they 
had  given  these  theories  impartial  consideration,  but  so  firmly 
were   the    old    ideas    intrenched    in    their   minds,    so    deep    the 


grooves  worn  by  the  habitual  trend  of  their  thoughts  in  the 
matter  under  review  that  they  were  not  really  capable  of  passing 
an  unbiased  judgment. 

It  is  no  easy  matter  to  abandon  the  old  mental  tracks  along 
which  the  accustomed  trains  of  thought  run  so  easily  and 
smoothly,  and  if  even  scientists  whose  religion  is  the  pursuit 
of  knowledge  for  its  own  sake  find  it  difficult  to  embrace  the 
new  merely  because  it  is  unfamiliar,  how  much  harder  must 
it  be  for  those  whose  selection  of  their  vocation  has  been 
prompted  more  by  utilitarian  motives  than  by  an  insatiable  thirst 
for  knowledge.  In  such  a  case,  as  is  to  be  expected,  there  is 
a  natural  reluctance  to  changes  which  will  disturb  the  existing 
order  of  things  and  it  is  not  therefore  at  all  surprising  that 
professional  men  are  often  ultraconservative  when  it  comes  to 
embracing  new  truths  and  casting  out  the  errors  and  half-truths 
of  yesterday. 

As  the  author  sees  it,  the  solution  of  the  problem  is  largely 
in  the  hands  of  the  manufacturing  executive.  If  he  demands 
certain  results  from  the  professional  accounting  advisers  he 
employs  to  formulate  methods  of  cost  accounting  and  refuses 
to  be  satisfied  with  anything  short  of  these  demands  the  self- 
interest  of  the  accounting  profession  will  force  a  readjustment 
of  its  ideas  in  connection  with  cost  accounting.  If,  on  the  other 
hand,  the  manufacturer  is  satisfied  with  systems  of  cost  account- 
ing designed  without  any  real  appreciation  of  the  requirements 
of  modern  industry,  the  development  of  cost  accounting  will 
be  the  result  of  a  slow  process  of  evolution.  The  question  of 
paramount  importance  is  Avhether  the  American  business  man 
can  afford  to  wait  for  a  leisurely  solution  of  so  vital  a  problem. 


SYNOPSIS  OF  BOOK 


Foreword iii 

Introduction vii 

Accepted  methods  of  cost  accounting  unsuitable  to  meet  needs  of  modern 
business— Defects  in  established  methods  disclosed  by  engineers — 
Methods  submitted  represent  application  of  scientific  management  idea 
in  cost  accounting  and  change  viewpoint  from  retrospection  to  pros- 
pection — Average  cost  system  not  over  50  per  cent  efficient— Great 
loss  due  to  systems  not  disclosing  inefficiencies  which  therefore  remain 
uncorrected  owing  to  ignorance  of  their  existence — Engineers  have 
proper  viewpoint  but  lack  knowledge  of  accounting  technique  whereas 
accountants  cling  to  obsolete  ideas — Illustration  of  difficulty  of  chang- 
ing established  ideas — Correction  of  defects  in  cost  accounting  methods 
largely  dependent  upon  the  manufacturing  executive. 

Chapter  I — The  Application  of  Scientific  Management I 

While  all  other  branches  of  industrial  management  have  shown  marked 
advance  in  recent  years  no  material  improvement  has  been  made  in 
cost  accounting  methods — Continuance  of  this  condition  largely  due  to 
ignorance  of  its  existence  by  manufacturers — Professional  accountants 
have  failed  to  read  the  "writing  on  the  wall" — Engineers  in  endeavor- 
ing to  replace  the  accountant  have  failed  through  lack  of  knowledge 
of  accounting  technique — Extreme  simplicity  of  design  a  fallacy- — 
Similarity  of  a  "Sistem  and  a  machine — Importance  of  diagrams — 
Seven  reasonable  requirements  of  a  cost  system — (i)  Accurate  costs 
of  specific  articles ;  no  matter  how  complicated  a  product  its  current 
cost  should  be  obtained  very  promptly — (2)  Manufacturing  Efficiency 
Data;  the  cost  of  idleness  must  be  distinguished  from  the  cost  of 
production — Variations  in  material,  labor,  power  and  tool  costs — (3) 
Promptness  i:i  furnishing  information  prime  requisite — Information 
which  should  be  obtained  daily,  weekly  and  monthly — (4)  Reports  for 
the  Executive — Possible  to  furnish  essential  facts  in  a  cost  statement 
on  a  single  sheet  of  paper — Principles  of  exceptions  as  applied  to  cost 
reports — Example  of  summarized  manufacturing  statement — This  state- 
ment should  be  supported  by  complete  detailed  statements — (5)  Sales 
Statistics — System  'should  show  profits  realized  (a)  by  salesmen,  (b) 
by  lines,  (c)  by  territories,  (d)  by  classes  of  customers  and  for  any 
combination  of  these — Estimated  profits  on  orders  received — (6)  Cost 
of  operating  system — should  be  economical  as  regards  time  of  (a) 
Executives,    (b)    Clerks,    (c)    Shop    employees — Economy    of    system 

xi 


Xll 

depends  on  proper  design — Futility  of  recording  time  on  detailed 
operations — Unnecessary  weighing  and  elaborate  stores  systems — (7) 
Standard  Practice  Instructions — Importance  of  these — Proper  design 
increases  efficiency  of  lower  grade  office  employees — Speed  and  accu- 
racy obtained  by  eliminating  personal  element — Typical  plan  of  cost 
accounting — confined  to  obtaining  historical  data  which  are  limited  in 
value — Difficulty  of  shifting  costs  of  labor  and  material — the  effort 
to  trace  causes  of  cost  increases — The  fallacy  of  low  non-productive 
labor  percentage — the  injustice  of  per  pound  and  per  piece  factors — 
Inelastic  methods  of  compiling  information — The  effect  of  lack  of 
focus — The  importance  of  sales  statistics — Lack  of  coordination. 

Chapter  II — Standards  and  Standard  Costs 33 

Forward  march  of  civilization  rendered  possible  only  by  use  of  stand- 
ards— False  ideals  and  standards — Division  of  responsibilities  of 
operating  and  accounting  divisions — The  function  of  the  oper- 
ating division — The  function  of  the  accounting  division — Illus- 
trations of  standards  without  records,  and  records  without  stand- 
ards— Average  office  illustration  of  absence  of  both  standards  and 
records — Can  costs  be  predetermined? — Cost-plus  systems — Standard 
costs  the  fundamental  improvement — Five  purposes  served  by  stand- 
ard costs — Cost  accounting  and  labor — Low  average  of  efficiency — ■ 
Profit  sharing — Mr.  Perkins'  views — Mr.  Leitch's  plan — Sound  psy- 
chology underlying  this — Doubt  as  to  it  being  essentially  just  or  of 
universal  application — Defective  in  basing  rewards  on  past  results — 
Only  means  of  making  equitable  distribution  is  a  system  of  cost 
accounting  which  is  based  on  standards  and  provides  for  distinguishing 
variations  over  which  the  worker  has  control  from  those  which  are 
beyond  his  control— The  influence  of  scientific  methods  on  industrial 
progress — Unfortunate  tendency  to  make  comparisons  with  past  re- 
sults rather  than  with  full  possibilities — Importance  of  records  which 
will  show  comparison  of  actual  results  with  results  possible — The 
first  step  towards  correcting  an  error  is  knowledge  of  its  existence — - 
The  principles  of  a  cost  system  based  on  standards  illustrated  by  a 
simple  example  showing  method  of  determining  manufacturing 
efficiencies — Current  costs  and  cost  of  sales — Discussion  of  principles 
of  burden  distribution — Illustration  of  error  when  departmental 
burden  rate  employed — Effect  of  decreased  production  on  burden 
element  in  costs. 

Chapter  III — The  Universal  Law  of  System 68 

Prosperity  of  a  business  depends  as  much  upon  its  intangible  assets 
as  upon  its  material  possessions — Andrew  Carnegie's  views — The 
breaking-in  process — Some  organizations  never  properly  "run  in"— 
Importance  of  system — Principles  not  devices — Efficiency  "experts" — 
Definition  of  system — Unity  underlying  systems — Comparison  of  sj-s- 
tem  of  human  body  with  that  of  a  business — Importance  of  good 
habits — Bad  business  habits — Why  business  methods  fall  short — Pro- 
cedure in  planning  routine  work — Special  qualification  needed  to  design 
a   cost    accounting   sjstem — Basic    principles    of    simple   cost    system— 


XIU 

Plan  illustrated  especially  suitable  for  concern  desirous  of  obtaining 
essential  information  with  least  possible  disturbance  and  expense — 
Absurdity  of  figuring  detailed  time  on  individual  operations — The  sum- 
marized manufacturing  statement — Cost  of  sales  and  profit  and  loss 
statement — Current  cost  of  machine — Figuring  standard  costs  of 
material— Figuring  standard  costs  of  labor  and  burden— Often  path 
of  wisdom  to  take  advantage  of  data  already  compiled  and  set  stand- 
ards on  basis  of  past  results  replacing  these  later  by  more  scientifically 
determined  standards — Even  if  standards  incorrect  they  enable  com- 
parisons from  month  to  month  to  show  trend  of  costs — The  use  of 
assays  or  tests  in  combination  with  past  results  in  setting  standards — 
Illustration  of  figuring  standard  cost  in  case  of  complex  piece  of 
silverware. 

Chapter  IV — The  Principles  of  Burden  Distribution 92 

The  right  system  invariably  a  compromise — Illustration  of  a  plan  where 
advantages  of  simplicity  in  design  deliberately  sacrificed  to  obtain  more 
important  benefits — Methods  of  burden  distribution  a  matter  of  judg- 
ment— Fallacy  underlying  usual  methods  of  making  burden  distribu- 
tion— Illustration  of  elaborate  "wheel-within-w^heel"  methods  of  burden 
distribution — Disadvantages  of  such  methods — Necessity  of  introduc- 
ing considerable  refinements  in  complex  situations — Underlying  prin- 
ciples of  machine  rates  illustrated  by  diagram  show'ing  method  of 
compilation  of  machine  rate,  also  showing  how  by  means  of  the 
machine  rate  it  is  possible  to  obtain  very  complete  data  relative  to 
operating  efficiencies. 

Chapter  V — Cooperation  and  Coordination no 

Strong  individualism  marked  characteristics  of  the  American  business 
man — Advantages  and  disadvantages — Efficiency  in  business  largely 
dependent  upon  two  factors :  cooperation  and  coordination — Ex- 
amples of  lack  of  cooperation — Cooperation  and  the  average  office — 
The  importance  of  cooperation  in  accounting — The  trend  toward 
cooperation  and  coordination — The  balancing  of  industrial  initiative 
and  organizational  needs — The  advantages  of  coordinating  methods — 
Manufacturers  apt  to  believe  systems  simpler  than  is  actually  the  case 
— Why  complex  businesses  demand  complex  systems — Diagram  of  a 
coordinated  cost,  planning  and  production  system — Disadvantages  of 
written  production  records — Transcribing  written  data  to  graphic  charts 
marked  step  in  advance  but  combination  of  written  and  graphic  record 
as  described  still  greater  improvement. 

Chapter  VI — The  Importance  of  Deliberation  in  Introducing  Changes  124 
Desire  for  immediate  showing  often  results  in  hasty  and  unwise  action — 
Correct  methods  can  only  be  determined  after  careful  and  deliberate 
thought — Improperly  designed  routine  methods  cause  continued  loss — 
Carefully  planned  changes  build  morale — The  general  plan  of  a  system 
should  be  drawn  first  and  the  details  developed  after  but  the  reverse 
procedure  is  often  adopted  with  disastrous  results — Importance  of 
bringing  manufacturing  data  to  a  focus — Description  of  machine  group 


XIV 

planning  and  control  board — Variety  of   information  obtained  by  use 
of  punched  cards. 

Chapter  VII— The  Principles  of  Scientific  Management 130 

The  development  of  the  scientific  management  idea  was  inevitable  com- 
ing as  it  did  as  a  direct  response  to  the  need  for  some  improvement 
over  the  old-time  haphazard  methods  of  management — Scientific  man- 
agement a  natural  trend — Illustrations  of  delay  in  realizing  full  sig- 
nificance o£  scientific  management  not  realized — Scientific  management 
more  than  shop  management — It  is  not  merely  a  system  of  shop  man- 
agement but  is  more  akin  to  a  mental  attitude — In  its  essential  features 
it  represents  the  use  of  the  trained  imagination  in  industrial  life — 
Elements  of  successful  operation — Illustrated  by  treasurers'  budgets — 
Crop  Statistics — Salesmen's  quotas — The  experimental  method — Appli- 
cation of  principles  of  scientific  management  by  modern  purchasing 
agent — Change  of  viewpoint  of  entrepreneur  from  retrospection  to 
prospection — All  problems  are  more  or  less  intra-departmental — The 
accounting  department  is  the  one  department  which  should  be  in  a 
position  to  coordinate  the  efforts  of  all  departments — Unfortunately  it 
does  not  fill  this  function  in  most  cases — The  two  problems  of  opera- 
tion— The  first  that  of  the  accountant,  the  second  that  of  the  executive 
■ — Necessity  for  revision  of  plans  no  argument  in  favor  of  not  making 
plans  but  rather  the  reverse — Illustration  of  the  principle  of  prede- 
termination in  case  of  a  concern  manufacturing  motor  trucks  and 
where  sales,  costs  and  profits  are  predetermined. 

Chapter  VIII — Cost  Accounting  and  the  Sales  Manager 145 

Defective  methods  of  cost  accounting  weaken  the  whole  fabric  of  busi- 
ness— In  the  shortcomings  of  its  competitors  lies  the  salvation  of  the 
average  business — Greatest  handicap  to  efficient  business  operation  is 
incomplete,  inadequate  and  inaccurate  information  relative  to  costs 
and  profits — Where  careless  figuring  brings  loss — "Where  have  our 
profits  gone"? — Tendency  to  "shade"  costs — Rough  and  ready  method 
of  determining  monthly  profits — Its  advantages  and  disadvantages — 
Information  as  to  profits  realized — The  use  of  punched  cards  in 
obtaining  sales  statistical  data — Limitation  of  usual  methods  which  are 
confined  to  furnishing  information  as  to  sales  but  not  as  to  profits 
made  on  sales — Bad  effect  of  such  methods  on  selling  organization — 
Fixing  responsibility  for  poor  showings — Selling  and  distribution  costs 
- — Impossible  under  usual  detailed  methods  of  cost  accounting  to  obtain 
requisite  information  with  permissible  expenditure — Figuring  the  cost 
of  sales — Illustrated  by  simple  example — Figuring  the  cost  of  sales  of 
complex  machinery — Immense  volume  of  clerical  work  required  to 
figure  cost  of  sales  under  usual  methods  responsible  for  failure  of 
many  manufacturers  to  obtain  this  information — Figuring  the  cost  of 
sales  for  an  exceedingly  varied  product — The  economy  of  this  plan 
as  compared  with  the  usual  method  of  figuring  cost  of  sales — Obtain- 
ing profits  and  losses  by  salesmen,  classes  of  customers,  etc. — Special 
problems  in  connection  with  figuring  cost  of  sales  by  list  and  standard 
cost  method — An  illustration  of  the  method  of  ascertaining  profits  and 


XV 

losses    made    by    individual    salesmen    in    the    agricultural    implement 
industry. 

Chapter  IX — Cost  Accounting  axd  Scientific  Method 178 

"The  business  of  science  is  to  predict" — Science  involves  an  investigation 
into  "causes" — The  value  of  prediction— Scientific  management  is  truly 
scientific — Briefly  stated  it  is  foresight,  the  predetermination  of 
methods  and  results — Difference  in  viewpoints  of  engineer  and  account- 
ant— Postmortem  cost  accounting — Views  of  Mr.  Emerson  and  Mr. 
Gantt — The  manufacturer's  need  of  knowledge — The  difliculty  of  com- 
parison— Cost  statements  do  not  distinguish  between  the  elements  of 
time  and  rate  or  quantity  and  price — Serious  defect  in  usual  methods 
of  cost  accounting  that  these  do  not  distinguish  between  the  cost  of 
idleness  and  the  cost  of  production — Engineers'  criticisms  of  profes- 
sional accountants — The  need  of  the  superintendent  for  adequate  cost 
information — The  value  and  limitations  of  experience — A  humiliating 
situation — The  larger  significance  of  double-entry  bookkeeping — The 
figuring  of  standardized  operations — The  use  and  abuse  of  time  clocks 
— The  method  of  distributing  labor  costs — Science  is  the  description 
of  the  course  of  events  b}-  the  aid  of  the  fewest  and  simplest  general 
formulas — In  cost  accounting  there  are  plenty  of  forms  but  few  for- 
mulas— Engineering  science  largely  founded  on  formulas — Tendency 
of  accountants  to  quibble  over  non-essentials — No  way  of  avoiding 
considerable  complexity  in  the  design  of  systems  to  efficiently  handle 
complex  business — The  complexity  should  however  be  confined  to  the 
design  and  should  not  extend  to  the  operation  of  the  system — Com- 
plexity in  design  and  simplicity  in  operation  obtained  by  the  use  of 
cost  formulas — Illustration  of  the  use  of  cost  formulas  in  the  pickling 
department  of  a  steel  mill — Use  of  cost  variation  sheet. 

Chapter  X — Establishing  a  Scientific  Basis  for  Cost  Accounting.  . .  202 
Dangers  of  specialism — Characteristics  of  the  scientific  mind — The  narrow 
specialism  of  scientific  management — The  value  of  cost  accounting 
formulas — Two  tables  of  formulas  the  use  of  which  is  illustrated  by 
several  examples — The  purpose  of  dual  comparisons — Changes  in 
standards  and  the  author's  method  of  handling  these. 

Chapter  XI — The  Future  of  Cost  Accounting 221 

Accountants  cannot  claim  that  their  attention  has  not  been  drawn  to  the 
defects  in  the  established  methods  of  cost  accounting  as  these  have 
been  emphasized  by  engineers — The  first  step  towards  correcting  an  in- 
efficiency is  determining  its  existence — Our  lack  of  accounting  methods 
— The  impossibility  of  providing  reliable  current  information  by  retro- 
spective systems — The  coordination  of  accounting  and  planning — The 
advantages  of  standard  costs — The  coming  revolution  in  cost  account- 
ing—The opportunity  before  accountants. 


THE  APPLICATION   OF 
SCIENTIFIC    MANAGEMENT 


Chapter  I 

SHOULD  a  manufacturer  be  told  by  a  competent  adviser  that 
one  of  his  machines  performing  an  important  operation 
was  grossly  defective  in  design,  and  while  expensive  to  operate 
was  turning  out  a  relatively  low  production  of  a  poor  grade 
of  product,  he  would  not  be  satisfied  until  he  had  learned  full 
details  of  where  the  trouble  was  and  had  taken  the  necessary 
steps  to  correct  it. 

One  of  the  most  important  and  expensive  machines  of  the 
average  manufacturer,  however,  is  in  just  the  condition 
indicated — it  is  costing  more,  often  far  more  than  it  should,  to 
produce  very  much  less  than  he  is  entitled  to  expect  from  it. 
The  machine  referred  to  is  the  cost  system — the  mechanism  for 
producing  vital  information  relative  to  the  operation  of  the 
business.  Curiously  enough,  while  all  other  branches  of  indus- 
trial management  have  made  marked  progress  in  the  last  few 
years,  cost  accounting  methods  in  general  have  made  no  material 
advance. 

It  would  be  futile  to  estimate  the  total  loss  involved  in 
inefficient  methods  of  cost  accounting,  but  it  is  probable  that 
the  average  cost  system,  taking  into  account  all  factors,  is  not 
more  than  50  per  cent,  efficient,  so  that  the  annual  loss  from 
this  cause  may  well  be  regarded  as  a  matter  of  considerable 
importance.  If  the  same  economic  loss  involved  in  inefficient 
methods  of  cost  accounting  were  found  to  result  from  defective 
technical  practice,  a  large  proportion  of  the  engineering  profes- 
sion would  undoubtedly  be  exercised  in  finding  some  means  of 
eliminating  this  unnecessary  tax  upon  industry. 

The  continuance  of  this  condition  of  inefficiency  has  ap- 
parently been  due  to  the   fact  that  the  manufacturer  has  not 


recognized  its  existence  and  though  in  some  cases  he  has  reaHzed 
in  a  vague  way  that  he  was  spending  a  lot  of  money  for  the 
information  his  cost  system  has  furnished,  he  has  accepted  the 
assurance  of  his  cost  accountant  that  the  methods  adopted  con- 
formed to  the  commonly  accepted  standards.  A  manufacturing 
business  cannot  be  safely  operated  without  some  information 
relative  to  costs.  This  fact  is  generally  realized  by  manufac- 
turers and  the  existing  methods  have  doubtless  been  retained  in 
many  cases  on  the  assumption  that  any  cost  system  is  better 
than  none  at  all. 

Professional  accountants,  who  should  obviously  be  the  leaders 
in  the  development  of  cost  accounting  methods,  have  failed  in 
a  marked  degree  to  read  the  "writing  on  the  wall,"  and  in  spite 
of  the  fundamental  changes  in  manufacturing  methods  intro- 
duced in  recent  years  have  made  few  contributions  of  importance 
toward  the  revision  of  cost  accounting  methods  to  conform  to 
these  industrial  developments. 

It  is  true  that  there  is  an  endless  amount  of  literature  on 
the  subject  of  cost  accounting,  but  it  follows  the  beaten  trail 
and  though  some  improvements  have  been  made  in  the  methods 
for  distributing  burden,  it  is  claimed  that  the  present  generally 
accepted  methods  of  cost  accounting  are  in  as  retarded  a  state 
of  development  as  w^ere  those  of  manufacturing  previous  to  the 
introduction  by  Frederick  W.  Taylor  of  the  idea  of  scientific 
management.  In  this  connection  reference  may  be  made  to  a 
recent  book  on  accounting,  written  by  a  recognized  leader  of 
the  accounting  profession,  a  chapter  of  which  is  devoted  to  the 
problems  of  cost  accounting,  but  neither  in  this  nor  the  rest 
of  the  book  is  any  reference  made  to  the  important  changes  in 
manufacturing  methods  which  have  resulted  from  the  adoption 
of  scientific  management  principles,  and  to  the  steps  which  should 
be  taken  to  bring  cost  accounting  methods  generally  into  line 
with  these  developments. 

Occasionally  there  will  be  found  professional  accountants  who 
seem  to  fully  appreciate  the  fact  that  the  cost  accounting  methods 
of  to-day  represent  little  if  any  advance  over  those  current  ten 
years  ago.  Practically  all  other  branches  of  industrial  manage- 
ment have  experienced  radical  changes  in  recent  years  but  it 
does  not  seem  to  have  occurred  to  accountants  that  cost  account- 
ing also  recjuires  to  be  revolutionized  in  order  to  con- 
form to  the  new  order  of  things  and  in  commenting  on  the 
slow  advance  which  cost  accounting  methods  in  general  have 
made  they  have  apparently  assumed  that  progress  in  this  science 


must  necessarily  be  a  process  of  exceedingly  slow  development 
whereas  what  is  required  and  urgently  so  is  not  a  gradual  evolu- 
tion in  methods  but  a  complete  and  speedy  revolution  in 
principle. 

This  viewpoint  of  professional  accountants  as  regards  the 
status  and  future  of  cost  accounting  is  well  reflected  in  the  fol- 
lowing somewhat  plaintive  remarks  taken  from  a  recent  review 
in  a  leading  accounting  journal: 

To  a  reviewer  of  books  on  accounting,  however,  there  soon  comes  a 
sense  of  shght  weariness  so  aptly  termed  in  trench-slang  as  "fed-uppedness" 
as  book  after  book  proves  to  be  an  old  friend  with  a  new  face.  He  is 
almost  tempted  to  exclaim  with  the  preacher :  "There  is  nothing  new  under 
the  sun."  In  the  nature  of  things  connected  with  an  art  based  upon  a 
few  faxed  principles  this  is  to  be  expected.  All  that  one  can  do  is  to 
bear  in  mind  that  improvements  in  accounting  methods  are  always  possible 
but   evolve  by  almost   imperceptible   degrees. 

The  engineering  profession,  however,  has  very  clearly  per- 
ceived .many  of  the  defects  and  absurdities  of  the  established 
methods  of  cost  accounting,  and  in  no  case  have  these  been 
better  demonstrated  than  by  J\Ir.  Harrington  Emerson  in  his 
work  entitled  "Efficiency  as  a  Basis  for  Operation  and  Wages.'" 
In  the  numerous  volumes  on  scientific  management  and  cost 
accounting  which  have  appeared  since  that  book  was  published 
it  is  surprising  to  find  so  little  information  along  constructive 
lines  as  to  the  methods  to  be  followed  in  order  to  put  into  prac- 
tical operation  the  ideas  advanced  by  Mr.  Emerson. 

As  to  whether  the  efficiency  engineer  ignored  the  accounting 
profession,  or  called  upon  it  in  vain  for  assistance  in  solving 
the  accounting  problems  associated  with  his  work  of  introducing 
the  principles  of  scientific  management,  is  a  Cjuestion  that  the 
author  is  not  in  a  position  to  answer.  In  endeavoring,  however, 
to  solve  these  problems  without  the  assistance  of  skilled  ac- 
countants, as  many  engineers  have  done,  they  have  apparently 
overlooked  the  fact  that  though  accounting  is  an  art  based  upon 
a  few  simple  principles,  the  effective  application  of  these  prin- 
ciples calls  for  years  of  study  and  practical  experience.  In  fact, 
when  the  engineer  wanders  into  the  domain  of  accounting  he 
is  apt  to  present  as  diverting  a  spectacle  as  would  the  accountant 
in  the  field  of  engineering. 


The  Engineer's  Failure  to  Appreciate  Cost  Accounting 

That  engineers  do  not  fully  appreciate  the  fact  that  cost 
accounting  is  a  complex  science  necessitating  specialized  knowl- 
edge for  its  application  is  evidenced  by  their  writings.  It  was 
a  distinct  shock  to  the  author  after  having  spent  a  number  of 
years  of  very  hard  work  in  developing  Mr.  Emerson's  ideas 
along  accounting  lines  to  find,  in  re-reading  one  of  his  books, 
the  somewhat  airy  statement  that  cost  accounting  can  be  very 
simply  and  easily  developed  from  the  cost  formula  he  gives. 
Another  engineering  writer  even  states  that  "the  employment 
of  an  expert  accountant  to  devise  and  install  a  cost  system  in 
a  manufacturing  and  repairing  plant  is  an  absurdity."  And 
further  that  "an  expert  on  shop  management  can  learn  the 
simple  accounting  required  in  a  short  time.  In  fact  he  cannot 
be  an  expert  without  this  knowledge." 

The  above  quotations  are  somew^iat  illuminating  as  illustrating 
the  tendency  for  an  expert  in  one  line  to  underrate  the  knowl- 
edge and  experience  required  to  qualify  as  an  expert  in  another. 
The  old  proverb  "a  little  knowledge  is  a  dangerous  thing"  applies 
to  accounting  as  well  as  to  other  things. 

That  the  primary  purpose  to  be  aimed  at  in  any  system  of 
accounts  is  extreme  simplicity  of  design  is  a  fallacy  that  will 
undoubtedly  die  hard.  A  cost  accounting  system  is  merely  a 
machine  for  the  production  of  specialized  information  and,  like 
any  other  complicated  piece  of  mechanism,  should  be  judged  not 
so  much  from  the  standpoint  of  simplicity  of  design  as  from 
that  of  the  results  obtained  from  its  use  and  the  facility  and 
economy  with  which  it  can  be  operated.  To  condemn  any  system 
of  accounting  on  the  sole  ground  of  its  complex  design  would 
be  as  absurd  as  to  complain  that  the  modern  automobile  is  far 
more  elaborate  in  its  design  than  was  Trevethick's  steam  carriage 
which  astounded  and  alarmed  the  pedestrian  in  1802.  Both 
represent  means  of  transportation,  the  earlier  machine  being 
absurdly  simple  in  design,  but  no  one  would  claim  that 
it  was  a  superior  article  to  the  later  invention.  Undoubtedly 
all  possible  simplicity  in  design  consistent  with  efficient  operation 
should  be  aimed  at,  but  the  term  is  a  purely  relative  one  and 
the  cjuestion  is  not  so  much  whether  a  system  is  simple  or  not 
but  whether,  taking  all  factors  into  consideration,  it  is  as  little 
complex  as  the  conditions  warrant. 

It  is  believed  that  the  methods  which  will  be  submitted  later 


in  the  present  work  will  demonstrate  that  accounting  plans  must 
be  quite  complex  in  design,  though  not  necessarily  difficult  in 
operation,  if  the  multiplicity  of  results  desired  are  to  be  obtained 
with  a  minimum  of  expense  and  without  duplication  of  effort. 
The  designing  of  such  plans  demands  a  high  degree  of  account- 
ing technique  and  a  fundamental  grounding  in  accounting  prin- 
ciples which  can  only  be  obtained  by  years  of  practical  accounting 
experience  which  obviously  the  engineer  is  not  often  in  a  position 
to  obtain. 


The  Similarity  of  a  System  and  a  Process  or  Machine 

The  author  has  visited  a  number  of  plants  where  extensive 
reorganization  work  has  been  undertaken  by  efficiency  engineers, 
but  in  no  case  which  has  come  to  his  attention  has  there  been 
any  complete  layout  of  the  plan  to  be  followed.  A  manufacturer, 
employing  the  services  of  an  engineer  to  design  a  machine  to 
meet  some  special  requirement  of  his  business,  would  certainly 
feel  entitled  to  call  for  complete  working  drawings  of  the  pro- 
posed machine  before  he  approved  the  spending  of  possibly 
several  thousand  dollars  for  its  construction,  particularly  so  if 
he  were  better  acquainted  with  the  manufacturing  processes 
involved  than  the  engineer  he  employed.  It  would  also  seem 
reasonable  for  a  manufacturer,  employing  the  services  of  effi- 
ciency engineers  to  undertake  the  introduction  of  improved 
methods  in  his  plant,  to  require  similar  complete  drawings  illus- 
trating the  results  contemplated  under  the  plan  and  the  steps 
proposed  to  realize  these  results.  For,  though  the  manufacturer 
is  calling  upon  outside  assistance  in  the  solution  of  his  problems, 
it  is  obvious  that  there  must  necessarily  be  many  details  of  the 
business  with  which  he  is  better  acquainted  than  the  experts  he 
employs,  and  his  careful  consideration  of  the  details  of  a  plan 
before  its  installation  is  attempted  may  often  obviate  the  neces- 
sity of  changing  methods  once  installed. 

The  first  step  toward  the  solution  of  any  problem  is  a  proper 
classification  of  all  of  the  factors  entering  therein,  and  the  most 
efifective  method  to  use  in  designing  a  plan  to  meet  the  needs 
of  a  complex  industrial  situation  is  to  clearly  show  on  paper 
the  various  elements  and  interrelationships  involved,  and  then 
to  follow  a  similar  method  in  formulating  and  presenting  plans 
to  meet  the  conditions  existing.  From  the  standpoint  of  the 
engineer  engaged  in  the  work  of  applying  scientific  manage- 


ment  principles,  and  in  the  introduction  of  improved  routine 
methods,  such  a  method  of  procedure  presents  marked  advan- 
tages. Not  only  does  it  aid  in  chirifying  the  problems  of  the 
engineer  but  it  also  provides  for  all  effort  expended  being  directed 
toward  a  clearly  defined  end  and  reduces  the  amount  of  super- 
vision required.  In  the  event  of  any  change  of  organization 
it  enables  the  work  to  proceed  without  embarrassment. 

In  the  course  of  his  professional  work  the  author  has  in- 
vestigated the  cost  systems  operated  in  approximately  a  hundred 
different  factories  but  he  cannot  recall  one  case  in  which  he 
found  that  any  systematic  attempt  had  been  made  to  diagram 
the  cost  methods  employed.  This  is  a  remarkable  fact  when 
it  is  considered  that  in  some  of  the  factories  hundreds  of  dif- 
ferent accounting  forms  had  been  introduced  piece-meal  and  hap- 
hazardly without  any  comprehensive  general  plan,  whereas  the 
superintendents  of  these  plants  would  not  think  for  even  a 
moment  of  constructing  a  one-car  garage  without  first  having 
complete  detailed  drawings  submitted  to  them. 

One  marked  disadvantage  of  not  having  complete  plans  for 
a  cost  system  before  the  attempt  is  made  to  install  it  is  the 
necessity  which  arises  as  a  result  of  this  negligence  for  the 
perpetual  changing  of  forms.  The  author  recalls  one  instance 
where  a  professional  accountant  changed  a  time  card  three  times 
in  one  month.  Emplovees  soon  lose  confidence  in  a  system 
which  is  always  being  changed  and  they  very  naturally  reach 
the  conclusion  that  the  designers  of  the  system  do  not  really 
know  what  they  want  the  result  being  that  the  work  of  introduc- 
ing the  system  is  rendered  more  difficult  than  necessary. 

Owing  to  the  almost  invariable  custom  of  introducing  cost 
methods  without  first  making  comprehensive  drawings  showing 
the  ultimate  results  to  be  accomplished  and  every  intermediate 
step  involved  in  obtaining  these  results  there  is  no  very  clear 
idea  in  the  minds  of  those  introducing  the  cost  methods  as  to 
exactly  what  results  they  are  endeavoring  to  accomplish,  with 
the  result  that  the  systems  start  out  ambitiously  enough  with 
elaborate  detailed  forms  but  get  nowhere  and  in  fact  are  remark- 
ably like  the  western  roads  referred  to  by  Ralph  Waldo  Emer- 
son which  "opened  stately  enough  with  planted  trees  on  either 
side,  to  tempt  the  traveler,  but  soon  became  narrower  and  nar- 
rower, and  ended  in  a  squirrel  track,  and  ran  up  a  tree." 

In  Figure  i  is  produced  a  section  of  a  drawing  illustrating 
this  idea  of  showing  the  operation  of  a  plan  in  considerable 
detail  and  in  diagram  form. 


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The  Reasonable  Requirements  of  a  Cost  System 

Though  it  is  obviously  somewhat  difficult  to  submit  any 
definite  standards  for  cost  accounting  methods  generally,  as 
these  will  greatly  depend  upon  the  character  of  the  business 
and  to  some  degree  upon  the  ability  of  the  organization  and 
the  extent  to  which  it  can  make  good  use  of  the  information 
which  would  be  obtained,  certain  more  or  less  general  require- 
ments can  be  stated. 

As  an  illustration  of  the  extended  scope  of  a  properly  designed 
cost  system,  the  following  list  is  given  of  demands  which  should 
reasonably  be  made  of  such  a  system  for  a  concern  manufac- 
turing a  varied  line  of  metal  parts,  some  standard  and  some 
special,  the  manufacture  of  which  involves  the  use  of  a  consider- 
able variety  of  machines. 

1  Accurate  Cost  of  Specific  Articles 

2  Manufacturing  Efficiency  Data 

3  Promptness  in  Furnishing  Information 

4  Reports  for  the  Executive 

5  Sales  Statistics 

6  Cost  of  Operating  the  System 

7  Standard  Practice  Instructions 


I  Accurate  Cost  of  Specific  Articles 

The  system  should  provide  for  the  tabulation  of  cost  data 
in  such  form  that  accurate  and  prompt  information  can  be 
obtained  as  to  costs  by  operations  and  in  total  of  parts,  part- 
assemblies  and  final  assemblies.  Not  only  should  the  system 
furnish  information  as  to  costs  actually  realized  but,  more  im- 
portant still,  it  should  provide  prompt  and  accurate  data  as  to 
what  costs  should  be  under  current  conditions.  In  fact,  in 
the  business  of  to-day  a  cost  system  that  does  not  provide  for 
a  predetermination  of  costs  cannot  be  regarded  as  in  any  way 
meeting  requirements.  In  many  cases  an  article  is  placed  on 
the  market  before  it  has  been  manufactured  in  sufficient  quanti- 
ties to  render  the  detailed  actual  cost  data  obtained  a  reliable 
guide  as  to  w^hat  the  cost  should  be  in  manufacturing  on  a  com- 
mercial scale  and,  unless  some  reliable  method  of  predetermin- 
ing costs  is  followed,  fixed  the  sales  price  of  the  article  is  largely 
a  matter  of  an  intelligent  guess. 


The  need  for  a  means  of  properly  predetermining  costs  is  felt 
by  most  manufacturers  but  such  work  as  is  done  along  these 
lines  is  generally  undertaken  independently  of  the  regular  cost 
system  and  not  being  subject  to  the  checks  and  balances  pro- 
vided by  a  correctly  designed  cost  system  these  estimated  costs 
are  often  seriously  incorrect.  The  author  recalls  one  instance 
where  a  predetermined  cost  of  a  tractor  had  been  made  which 
on  investigation  was  found  to  have  omitted  the  cost  of  the 
wheels ! 

The  feasibility  and  importance  of  predetermining  costs  has 
been  enlarged  upon  by  several  writers  on  cost  accounting,  but 
as  far  as  the  author  knows  there  is  no  book  on  cost  accounting 
which  illustrates  how  a  cost  system  can  be  designed  so  that  this 
function  of  cost  predetermination  will  form  an  integral  part  of 
the  general  plan. 

The  importance  of  cost  predetermination  is  emphasized  by 
Benjamin  A.  Franklin,  who  in  his  stimulating  and  interesting 
book  "Cost  Reports  for  Executives"  writes  as  follows: 

This  variation  of  the  cost  of  the  same  article  at  different  times  con- 
stitutes the  important  point,  not  only  in  the  proper  understanding,  but  in 
the  appreciation  of  costs.  The  abilitj-  to  master  this  point  and  to  figure 
estimates  or  prediction  of  cost  from  a  standard  under  varying  conditions 
gauges  the  comprehension  or  the  meaning  and  value  of  practical  costs. 

Another  writer  who  has  dealt  with  the  cost  predetermination 
function  of  a  cost  system  is  William  B.  M.  Ferguson,  who  in 
"Estimating  the  Cost  of  Work"  makes  the  following  remarks: 

In  the  art  of  estimating,  it  is  only  in  determining  what  costs  should 
be,  if  we  eliminate  preventable  waste  (or  using  Mr.  Emerson's  term,  it 
is  only  in  predetermining  costs)  that  we  establish  a  standard  which  is 
"a  criterion  of  excellence."  In  estimating  what  costs  will  actually  be  we 
use  for  a  standard  of  comparison  the  type  or  example  of  past  performance 
which  represents  the  average  cost  of  work,  under  standard  conditions.  By 
thus  using  a  standard  estimate  for  each  unit  (whether  the  unit  chosen  be 
an  object  or  operation),  based  on  the  cost  of  a  standard  number  of  units 
under  certain  conditions  taken  as  standards  the  estimator  can  proceed 
methodically  to  classify  and  study  all  cost  data  and  estimates  with  reference 
to  such  standards. 

In  concerns  manufacturing  a  standard  product,  no  matter  how 
complicated,  a  system  of  cost  accounting  if  properly  designed 
should  enable  accurate  information  of  the  current  costs  of  manu- 
facture to  be  obtained  very  promptly.  For  instance,  in  a  busi- 
ness such  as  the  manufacture  of  agricultural  implements,  where 
many  different  kinds  of  machines  are  manufactured,  it  should 


be  possible  for  the  cost  accountant  to  furnish  an  approximately 
accurate  cost  of  any  machine  under  current  conditions  in  less 
than  half  an  hour  after  the  information  is  called  for,  and  this 
should  be  so  even  if  the  machine  in  question  comprises  several 
hundred  parts  and  necessitates  the  performance  of  five  times 
as  many  operations. 

2  Manufacturixg  Efficiency  Data 

Cost  of  Idleness.  No  system  of  cost  accounting  can  be  con- 
sidered as  in  any  way  suitable  to  meet  the  needs  of  the  manu- 
facturer which  does  not  distinguish  between  the  cost  of  produc- 
tion and  the  cost  of  idleness.  Under  the  usual  methods  it  is 
necessary  to  distribute  the  total  expenditures  for  the  month  over 
the  total  product  for  the  month  regardless  of  whether  the  factory 
is  operating  at  full  capacity  or  not  with  the  result  that  the  effect 
of  what  is  probably  the  most  important  single  cost  factor,  namely 
that  of  idleness,  is  merged  in  the  general  costs. 

Every  manufacturer  knows  that  when  operating  at  less  than 
full  capacity  his  costs  will  increase  owing  to  certain  of  his 
expense  remaining  whether  he  operates  at  full  capacity  or  not 
but  there  is  all  the  difference  in  the  world  between  knowing 
this  fact  in  a  general  way  and  having  cost  statements  showing 
monthly  the  total  amount  costs  have  been  increased  owing  to 
the  failure  of  the  factory  to  realize  its  full  production  possi- 
bilities. 

Variations  in  fixed  charges  owing  to  the  production  being 
less  than  lOO  per  cent  of  capacity  should  be  analyzed  as  due  to: 

(a)  Actual  idleness  of  the  department  or  the  plant  as  a 

whole 

(b)  Shortage  of  operators 

(c)  The  average  production  per  operator  being  less  than 

standard 

Labor.  The  cost  system  should  furnish  complete  data  relative 
to  manufacturing  efficiencies  and  in  particular  information  re- 
garding the  efficiency  of: 

(a)   The   individual   operator   daily,    weekly  or   at   longer 

periods 
(6)   A  class  of  workers 

(c)  A  department 

(d)  A  plant  as  a  whole 


10 


Furthermore,  increases  or  decreases  in  cost  should  be  analyzed 
into  those  resulting  from  changes  in: 

(a)  The  rate  of  wages  paid 

(b)  The  time  consumed  in  the  performance  of  manufac- 

turing operations. 

Material.  The  system  should  provide  for  showing  daily, 
weekly  or  monthly,  as  desired,  increases  or  decreases  in  cost 
resulting  from  variations  in: 

(a)  The  purchase  price  of  material 

(b)  The    efficiency    of    the    use    of    material,    this    being 

analyzed    as    to :    individual    operators,    classes    of 
operators,  a  department  and  a  plant  as  a  whole. 

Manufacturing  Expenses.  The  increases  or  decreases  in  cost 
resulting  from  variations  in  expense  should  be  shown  in  the 
completest  form,  and  in  particular  the  following  information 
should  be  provided : 

Handling  and  Transporting  Expense.  Increases  or  decreases 
in  cost  should  be  shown  for  the  various  main  classes  of  material 
and  for  miscellaneous  stores  and  supplies. 

Pozver.  Records  should  show  increases  or  decreases  in  power 
cost  analyzed  as  to  those  resulting  from  variations  in: 

{a)   The  cost  of  power. 

(6)   The  efficiency  of  use  of  power. 

In  the  former  case  cost  fluctuations  should  be  analyzed  as  to 
cost  of  coal,  unloading  and  handling,  power  purchased,  labor, 
repairs  and  supplies. 

Miscellaneous  Stores  and  Supplies.  Increases  or  decreases  in 
cost  should  be  shown  divided  by  departments,  and,  if  desired, 
by  individual  operators.  These  increases  or  decreases  should 
be  analyzed  as  to  those  resulting  from  variations  in: 

(a)  The  purchase  price  of  supplies 

(b)  The  efficiency  of  use  of  supplies 

Tool  Costs.  Information  should  be  provided  showing  the 
daily,  weekly  or  monthly  variations  in  the  cost  of  tools  divided 
as  to: 


II 

(a)  Classes    of    machines,    or    individual    machines    when 

desired 

(b)  Departments 

(c)  A  plant  as  a  whole 

In  addition,  such  variations  should  be  analyzed  to  show  in- 
creases or  decreases  resulting  from  fluctuations  in  the  purchase 
price  of  tools  or  in  the  cost  of  making  them,  and  variations  in 
the  efficiency  of  the  use  of  tools. 

Machine  Costs.  Very  complete  information  should  be  pro- 
vided as  to  machine  efficiencies,  this  showing  increases  or  de- 
creases in  cost  resulting  from  variations  in: 

(a)  The  number  of  hours  a  machine  is  operating 

(b)  The     production     efficiency     of     the     machine     when 

operating 

(c)  The  cost  of  maintaining  and  operating  the  machine 

Spoilt  JJ^ork.  Increases  or  decreases  in  cost  resulting  from 
fluctuations  in  the  loss  from  spoilt  work  should  be  shown  daily, 
weekly  or  monthly  divided  as  to:  individual  operatcjrs,  classes 
of  operators,  classes  of  product,  departments  and  a  plant  as  a 
whole. 

Miscellaneous  Works  Expense.  Full  information  should  be 
provided  as  to  increases  or  decreases  in  costs  resulting  from  varia- 
tions in  actual  expense,  compared  with  standard,  these  data  being 
arranged  under  the  account  classification  most  suitable  for  the 
business. 


3  Promptness  in  Furnishing  Information 

The  value  of  information  relative  to  the  cost  of  manufac- 
turing operations  is  generally  in  direct  ratio  to  the  promptness 
with  which  such  information  is  furnished.  Though  it  is  not 
usually  feasible  to  provide  complete  statements  covering  all  of 
the  operations  of  the  business  at  very  short  inter\^als,  owing 
to  the  expense  which  would  be  involved,  at  the  same  time  there 
are  certain  very  necessary  reports  which  should  be  furnished 
to  the  shop  executive  every  day. 

The  following  is  indicative  of  the  character  of  the  information 
which  should  be  provided  daily: 


12 


Summarized  Manufacturing  Report: 

Goods  ordered,  manufactured  and  shipped  to-day  and  to  date, 
divided  as  to  classes  and  by  any  further  sub-division  desired. 

Summarized  Payroll  Report  by  Departments: 
Number  of  employees  on  roll. 
Number  of  employees  absent  or  working  short  hours  and  total 

hours  so  lost. 
Actual  hours  worked  by  operators. 
Standard  hours  of  work  produced  by  operators. 
Percentage  of  efficiency  realized. 
Payroll  of  operators. 
Average  rate  per  hour  of  operators. 
Hours  worked  other  than  by  operators. 
Payroll  of  employees  other  than  operators. 
Average  rate  per  hour  of  such  employees. 
Total  hours  worked  by  all  employees. 
Average  rate  per  hour  earned  by  all  employees. 

Summarized  Machine  Report  for  Each  Machine  and  Class  of 
Machine: 
Standard  hours. 
Actual  hours  worked. 
Employment  efficiency. 
Standard  production. 
Actual  production. 
Operating  efficiency. 
End  efficiency. 

In  addition  to  providing  for  information  being  furnished 
daily  to  the  shop  executive  in  the  form  of  summarized  reports 
as  described  above,  provision  should  be  made  in  the  design  of 
the  cost  system  for  all  data  relative  to  costs  and  operations 
being  so  compiled  as  to  render  it  possible  at  any  time  to  obtain 
very  promptly  any  arrangement  of  such  data  required. 

Owing  to  the  very  considerable  amount  of  clerical  work 
involved  in  the  compilation  of  complete  cost  statements  covering 
all  of  the  activities  of  a  factory  it  has  become  an  almost  universal 
custom  for  these  statements  to  be  prepared  monthly,  the  number 
of  days  elapsing  between  the  end  of  the  month  and  the  issuing 
of  these  statements  varying  from  five  days  to  a  month  or  more. 
Even  under  the  best  conditions,  however,  it  will  be  obvious  that 
some  of  the  information  presented  in  these  statements  must  be 


13 

in  regard  to  events  which  are  over  a  month  old  and  by  the  time 
the  cost  statements  have  been  examined  sufficiently  to  enable 
the  superintendent  to  determine  where  conditions  appear  to  be 
unsatisfactory  the  time  which  has  elapsed  between  the  event  and 
the  investigation  will  often  render  the  latter  of  little  value. 

Complete  information  relative  to  costs  cannot  in  the  nature 
of  things  be  economically  presented  to  the  operating  executive 
daily,  but  much  of  the  information  incorporated  in  the  monthly 
statements,  and  in  fact  most  of  the  really  essential  information 
can  and  should  be  made  up  weekly  and  in  view  of  the  fact 
that  payrolls  are  generally  made  up  on  a  weekly  basis  it  would 
seem  obvious  that  as  regards  labor  costs  at  least  it  is  the  logical 
procedure  to  furnish  the  superintendent  with  complete  informa- 
tion relative  to  this  class  of  expense  and  not  to  hold  up  informa- 
tion which  can  be  so  readily  obtained  until  the  end  of  the  month 
because  it  is  not  feasible  to  make  burden  distributions  until  that 
time. 


4  Reports  for  the  Executive 

It  is  by  no  means  unusual  for  the  executive  of  a  large  manu- 
facturing company  to  be  presented  at  the  close  of  the  month 
with  cost  statements  in  such  voluminous  form  as  to  render  these 
a  substantial  volume  and  the  amount  of  time  which  the  con- 
scientious executive  is  compelled  to  devote  to  the  study  of  such 
statements  is  a  serious  form  of  avoidable  industrial  waste.  The 
idea  that  an  executive  should  be  compelled  to  \vade  through 
dozens  of  detailed  statements  involving  hundreds  and  often 
thousands  of  figures  is  an  absurdity  which  it  would  seem  would 
be  self-evident  but  the  condition  is  so  general  that  the  average 
executive  apparently  accepts  the  situation  as  being  an  inevitable 
one.  As  a  matter  of  fact  it  is  perfectly  possible  to  furnish  the 
executive  of  a  large  manufacturing  plant  with  a  summarized 
cost  statement  on  a  single  sheet  of  paper  of  ordinary  letter  size 
from  which  in  a  few  minutes  he  can  learn  more  about 
the  essential  facts  of  his  business  than  would  be  possible  from 
spending  hours  in  grappling  with  the  usual  detailed  cost  state- 
ments. 

Monthly  cost  statements  in  general  are  confined  to  a  tabula- 
tion of  expenditures  which  are  shown  without  relation  to 
standards  so  that  the  executive  is  compelled  to  rely  for  his 
information  as  to  the  trend  of  costs  on  making  comparisons 


14 

of  the  cost  of  each  item  of  expense  for  this  month  with  that 
for  the  month  previous  and  so  on,  a  laborious  and  everlasting 
procedure  which  consumes  a  great  deal  of  time  and  produces 
little  results. 

George  Horace  Lorimer  in  his  "More  Letters  from  a  Self- 
Made  Merchant  to  his  Son"  strikes  the  keynote  of  the  con- 
servation of  the  time  of  executives  when  he  writes: 

In  the  first  place,  you  don't  need  to  bother  very  much  about  the  things 
that  are  going  all  right,  except  to  try  to  make  them  go  a  little  better;  but 
you  want  to  spend  your  time  smelling  out  the  things  that  are  going  all 
wrong  and  laboring  with  them  till  you've  persuaded  them  to  lead  a  better 
life.  For  this  reason,  one  of  the  most  important  duties  of  your  job  is 
to  keep  track  of  everything  that's  out  of  the  usual.  If  anything  unusually 
good  happens,  there's  an  unusually  good  man  behind  it,  and  he  ought  to 
be  earmarked  for  promotion;  and  if  anything  unusually  bad  happens,  there's 
apt  to  be  an  unusually  bad  man  behind  that,  and  he's  a  candidate  for  a 
job  with  another  house. 

In  the  above  quotation  George  Horace  Lorimer  is  describing 
the  application  in  industrial  life  of  the  "principle  of  exceptions" 
that  is,  the  concentration  of  attention  to  the  abnormal  and 
unfavorable  condition  and  the  spending  of  no  more  time  on 
the  normal  than  is  necessary  to  establish  the  fact  of  its  being 
normal.  If  it  is  desired  to  eliminate  the  shocking  loss  of  time 
of  industrial  leaders  due  to  the  lack  of  focus  in  thie  accounting 
statements  with  which  they  are  furnished  it  is  necessary  that 
this  principle  of  exceptions  he  applied  to  cost  accounting  methods 
and  this  involves  firstly  the  comparisons  of  all  expenses  with 
standards  and  secondly  the  analysis  of  variations  from  standard 
as  to  the  causes  underlying  such  variations. 

The  summarized  cost  statement  which  should  be  furnished 
the  executive  of  a  manufacturing  company  should  not  recjuire 
more  than  fifty  figures  at  the  most  to  furnish  him  with  a  view 
in  proper  perspective  of  the  trend  of  his  manufacturing  costs 
and  the  following  taken  from  an  actual  form  used  by  the  author 
clearly  illustrates  the  principles  involved: 

Summarized   Manufacturing   Statement   Month   of 

Total   Actual    Cost    for    Month ^ooo.oo 

Total   Standard   Cost   for   Month $000.00 

Net  Increase  or   Decrease   Comparing  Actual   witli 

Standard* $000.00 

*Increases  always  shown  in  red  and  Decreases  in  black. 


15 


ANALYSIS    OF    ABOVE    VARIATION    EY    CAUSES 

Variations  in  Fixed  Charges  Due  to  Fluctuations  in 
Production  Caused  By : 

1  Calendar   variations $000.00 

2  Idle  time $000.00 

3  Variation  in   number  of  operators $000.00 

4  Variations  in  efficiency  of  operators $000.00    $000.00 

Variations  in  Direct  Labor   Costs   Due   To : 

1  Rates    $000.00 

2  Efficiency   of   operators $000.00    $000.00 

Variations  in  Indirect  Labor  Costs  Due   To : 

1  Rates    $000.00 

2  Hours    $000.00 

3  Extra  pay  for  overtime $000.00     $000.00 


Variations  in  Back-Work  Labor  Costs  Due  To : 

1  Rates    $000.00 

2  Hours   $000.00    $000.00 

Variations    in    Stores    and    Supplies   Due    To : 

1  Price    $000.00 

2  Consumption  $000.00     $000.00 

Variations   in   Power   Cost  Due   To : 

1  Cost   of   producing   power $000.00 

2  Efficiency  of  use  of  power $000.00     $000.00 

Variations  in   Salaries  Due   To : 

1  Rates    $000.00 

2  Number  of  salaried  persons  employed $000.00     $000.00 

Variation   in  ^liscellaneous   Expense $000.00 

Net  Increase  or  Decrease  as  above $000.00 


Supporting  the  summarized  statement  should  be  detailed 
statements  providing  the  executive  with  the  fullest  details  as 
to  the  inefficiencies  disclosed  in  total  on  the  statement.  For 
instance,  if  an  increase  in  the  salary  expense  attracts  his  atten- 
tion he  should  be  able  to  turn  instantly  to  a  detailed  statement 
which  will  show  him  exactly  in  which  departments  and  positions 
such  increase  occurred.  The  essential  idea  underlving  reports  to 
executives  should  be  the  presentation  of  statements  in  such  form 
that  the  unfavorable  condition  stands  out  prominently  on  the 


i6 

summarized  statement  (for  this  reason  cost  increases  under  the 
author's  methods  are  invariably  shown  in  red  ink)  and  the  time 
is  rapidly  approaching  when  no  executive  worthy  of  the  name 
will  be  satisfied  to  spend  time  in  analyzing  detailed  cost  state- 
ments in  an  effort  to  locate  essential  information  which  under 
a  properly  designed  system  should  automatically  and  unmistak- 
ably be  drawn  to  his  attention. 

The  system  should  of  course  show  monthly  the  net  profit 
realized  from  operations,  gross  profits  being  shown  as  to  lines, 
specific  articles,  or  under  such  classification  as  is  best  suited  to 
meet  the  needs  of  the  particular  business.  Furthermore,  the 
statements  should  clearly  indicate  the  extent  to  which  fluctua- 
tions in  profits  have  resulted  from  variations  in  the  prices 
realized  for  the  product  and  from  variations  in  the  cost  of 
manufacture. 


5  Sales  Statistics 

The  system  should  be  designed  to  enable  any  reasonable  refine- 
ment of  selling  efficiency  data  to  be  obtained.  In  particular, 
information  should  be  provided  showing  the  profits  realized: 

(a)  By  salesmen 

(b)  On  different  lines 

(c)  By  territories 

(d)  By  different  classes  of  customers 

In  addition,  it  should  be  possible  to  obtain  expeditiously  any 
combination  of  the  above  information,  as  for  instance  profits 
realized  by  salesmen  on  each  line,  or  profits  realized  on  different 
lines  by  territories,  etc. 

In  addition  to  providing  for  very  complete  data  relative  to 
profits  and  losses  realized  from  actual  deliveries  to  customers, 
the  system  should  render  it  possible  to  obtain  at  least  ap- 
proximately correct  information  relative  to  the  profits  which 
should  be  realized  on  orders  accepted  but  not  filled.  The  pre- 
determination of  profits  is  a  corollary  to  the  predetermination 
of  costs  and  though  figures  as  to  the  former  will  be  accepted 
by  the  wise  executive  with  due  reservation,  properly  used  they 
should  prove  of  the  greatest  assistance  in  his  direction  of  the 
policies  of  the  business.  Furthermore,  with  a  properly  designed 
system  the  executive  is  furnished  each  month  with  full  informa- 
tion as  to  where  the  actual  results  have  varied  from  the  estimates. 


17 

and  as  to  the  causes  for  such  variations,  so  that  he  is 
enabled  to  adjust  his  plans  to  conform  to  fluctuating  con- 
ditions. Whereas  in  the  past  executives  were  satisfied  with 
receiving  annual  statements  of  profit  and  loss,  and  in  the  present 
are  in  many  cases  content  to  obtain  monthly  information  as 
to  profit  actually  realized,  in  the  near  future  they  will 
demand  the  predetermination  in  large  measure  of  costs 
and  profits.  In  place  of  working  to  a  more  or  less  nebulous 
end,  each  member  of  the  organization  will  have  definite  standards 
to  strive  for,  the  extent  to  which  such  standards  have  been 
realized  being  reflected  in  the  cost  accounts  and  in  the  reports 
to  the  executive. 

Business  men  are  gradually  emerging  from  the  retrospective 
to  the  prospective  attitude  and  in  the  author's  opinion,  the 
accountant  of  the  future  will  spend  more  time  in  making  intel- 
ligent forecasts  than  in  recording  past  events. 

6  Cost  of  Operating  the  System 

The  cost  system  should  be  economical  as  regards: 

(a)  Executives,  whose  time  in  many  organizations  is 
wasted  to  an  appalling  degree  in  the  endeavor  to 
extract  vital  information  from  the  mass  of  undi- 
gested cost  data  presented  to  them 

(6)   Clerks 

(c)  Shop  employees,  in  particular  as  regards  time  spent 
in  making  out  detailed  time  distributions,  weighing 
material,  etc. 

The  importance  of  a  system  of  cost  accounting  being  designed 
with  a  view  to  conserving  the  time  of  executives  has  already 
been  dealt  with  in  preceding  paragraphs.  For  a  system  to  be 
economical  as  regards  the  number  of  clerks  necessary  to  carry 
it  along  depends  in  large  measure  upon  the  judgment,  ingenuity, 
and  experience  possessed  by  its  designer  and  in  this  connection 
it  may  be  mentioned  that  many  manufacturers  adopt  a  penny- 
wise  and  pound-foolish  policy  in  entrusting  the  design  of  their 
cost  systems  to  the  men  they  expect  to  operate  them  afterwards. 
Such  a  policy  is  equivalent  to  expecting  the  designer  of  a  steam 
engine  to  spend  the  balance  of  his  life  operating  it,  for  it  would 
seem  to  be  obvious,  if  the  matter  is  given  any  consideration, 
that  an   accountant  possessing  the   imagination,   training,    and 


ability  to  successfully  design  cost  accounting  plans  to  meet  com- 
plex conditions  and  to  get  the  desired  results  with  minimum 
operating  expense  will  nut  generally  be  open  to  a  proposition 
to  abandon  the  fascinating  sphere  of  design  for  the  useful  but 
certainly  less  stimulating  field  of  routine  cost  work. 

An  important  point  to  be  considered  in  the  drawing  up  of 
cost  accounting  plans  is  the  proper  coordination  of  the  work 
of  the  cost  department  with  that  of  the  production  and  planning 
department,  and  in  later  chapters  illustrations  are  given  of 
coordinated  cost,  planning  and  production  systems  where  this 
important  recjuirement  is  given  full  consideration. 

Systems  of  cost  accounting  which  demand  the  keeping  by  or 
for  each  workman  of  a  record  of  the  time  spent  on  each  stand- 
ardized operation  he  performs  during  the  day  result  in  the  waste 
of  a  great  deal  of  time  of  producers  and  in  idleness  of  equip- 
ment in  order  to  compile  data  v/hich  in  the  majority  of  cases 
are  of  exceedingly  limited  value.  The  author  has  seen  operators 
working  on  as  many  as  twenty  to  thirty  short-time  operations 
in  a  day  being  compelled  to  walk  fifty  feet  or  more  to  a  time 
clock  every  time  they  finished  a  job,  and  to  this  wasted  time 
should  be  added  that  spent  by  the  cost  clerks  in  making  minute 
distributions  and  postings  of  time  to  detailed  cost-of-part  cards 
to  which  reference  was  hardly  ever  made.  There  may  be  situa- 
tions where  it  is  necessary  to  figure  the  elapsed  time  on  every 
job  a  workman  does,  but  if  there  are  these  are  the  exceptions 
rather  than  the  rule. 

Much  unnecessary  work  Is  often  called  for  in  the  operation 
of  a  cost  system  owing  to  the  performance  of  needless  weighing 
operations.  Such  superfluous  work  not  only  involves  the  direct 
expense  of  weighing  but  also  the  indirect  loss  resulting  from 
the  slowing  up  of  manufacturing  operations  and  in  the  cost 
of  clerical  work  involved  in  recording  this  unnecessary  weighing. 
It  is  hardly  necessary  to  remark  that  complete  and  proper  con- 
trol should  be  exercised  over  material  but  it  will  often  be  found 
that  by  the  exercise  of  a  little  intelligent  planning  just  as  effect- 
ive control  can  be  maintained  by  performing  half  as  many 
weighing  operations  as  were  previously  considered  necessary. 

Very  often  considerable  unnecessary  expense  is  involved  In 
the  operation  of  stores  systems  particularly  those  In  which  stores 
accounts  are  carried  both  In  quantities  and  money  values  for 
every  Item  of  stock  carried.  The  author  recalls  one  Instance 
where  an  express  bill  for  fifty  cents  was  distributed  over  twenty 
different  stores  accounts.     The  case  was  exceptional,  of  course, 


19 

but  there  is  no  doubt  that  many  stores  systems  cost  at  least 
twice  as  much  as  they  should  owing  to  this  lack  of  a  sense 
of  relative  values  on  the  part  of  their  designers. 

Manufacturers  are  apt  to  consider  the  cost  of  their  cost 
departments  to  be  confined  to  the  pa}Toll  of  the  cost  department 
but  this  is  practically  never  the  case  and  the  indirect  expense 
resulting  from  an  improperly  designed  cost  system  can  very 
easily  amount  to  a  serious  drain  on  a  business. 


7  Standard   Practice   Instructions 

The  plan  of  the  system  and  the  details  of  its  operaticm  should 
be  clearly  laid  down  in  diagram  form  so  that  employees  can 
easily  understand  the  routine  involved  and  the  relation  of  their 
work  to  the  general  scheme.  There  should  be  no  possibility  of 
things  being  done  wrong  owing  to  the  absence  of  the  clearest 
possible  instructions  as  to  the  right  way  in  which  to  do  them. 
Under  this  head  will  come  the  provision  for  a  complete  descrip- 
tive card  of  accounts  that  will  leave  nothing  to  the  imagination, 
for  this,  though  a  faculty  of  great  value  in  certain  conditions, 
is  distinctly  out  of  place  in  account  distribution. 

The  author  has  previously  drawn  attention  to  the  fact  that 
cost  accounting  plans  suitable  to  meet  the  complex  conditions 
presented  by  the  modern  large  industrial  establishment  and  cap- 
able of  furnishing  the  multiplicity  of  results  demanded,  with 
a  minimum  of  expense  and  without  duplication  of  effort,  must 
necessarily  be  complex  in  design  but  this  in  itself  is  not  a  serious 
matter  provided  the  systems  can  be  so  drawn  up  as  to  render 
their  operation  comparatively  simple.  This  result  can  be  realized 
with  the  assistance  of  diagrams  such  as  the  author  uses,  numer- 
ous illustrations  of  which  appear  in  this  book,  and  through  the 
aid  of  the  formulas  given  in  later  chapters  which  render  it  pos- 
sible for  the  ordinary  grade  of  office  help  to  perform  the  most 
complex  cost  calculations  speedily,  accurately,  and  mechanically. 

It  is  naturally  to  be  expected  that  the  application  of  the  prin- 
ciples of  machine  design  in  the  field  of  cost  accounting  would 
develop  results  in  the  production  of  cost  information  similar 
to  those  realized  from  the  development  of  machinery  in  factory 
production.  In  the  latter  case  as  the  complexity  of  the  machine 
increased  the  producing  capacity  of  the  lower  grades  of  labor 
also  increased ;  bv  the  aid  of  modern  automatic  machinery  a 
semi-skilled  workman  now  producing  better  and  infinitely  more 


20 

work  than  could  the  skilled  workman  of  an  earlier  period.  In 
a  similar  manner  the  complex  accounting  structures  developed 
by  the  author  enable  a  lower  grade  of  office  help  to  produce 
more  and  better  information  than  is  possible  under  the  simpler 
but  less  efficient  forms  of  cost  accounting. 

Speed  and  accuracy  in  cost  accounting  work  can  only  be 
obtained  by  eliminating  the  personal  element  in  the  greatest  pos- 
sible degree  by  rendering  the  routine  work  as  nearly  mechanical 
as  possible.  This  principle  is  not  only  applicable  to  cost  account- 
ing work — it  touches  all  branches  of  human  effort,  for  as  A.  N. 
Whitehead  in  his  "Introduction  to  Mathematics"  states: 

It  is  a  profoundly  erroneous  truism,  repeated  by  all  copybooks  and 
by  eminent  people  when  they  are  making  speeches,  that  we  should  cultivate 
the  habit  of  thinking  of  what  we  are  doing.  The  precise  opposite  is  the 
case.  Civilization  advances  by  extending  the  number  of  important  opera- 
tions which  we  can  perform  without  thinking  about  them.  Operations  of 
thought  are  like  cavalry  charges  in  a  battle — they  are  strictly  limited  in 
number,  they  require  fresh  horses,  and  must  only  be  made  at  decisive 
moments. 

The  basic  underlying  defect  in  systems  which  are  unduly 
expensive  to  operate  will  generally  be  found  to  be  faulty  design 
and  the  absence  of  adequate  standard  practice  instructions.  A 
cost  system  which  everlastingly  demands  the  making  of  decisions 
as  to  how  this  problem  should  be  met  and  how  that  is  like  a 
faulty  designed  machine  which  is  always  breaking  down  and 
calling  for  minor  adjustments.  In  the  average  cost  department 
95  per  cent  or  more  of  the  time  of  the  chief  cost  accountant 
is  consumed  in  supervising  the  routine  work  of  getting  out 
figures  and  only  5  per  cent  in  making  use  of  the  figures  after 
they  have  been  compiled  whereas  the  situation  should  be  reversed 
and  95  per  cent  of  his  time  should  be  spent  in  the  interpretation 
of  the  figures  and  only  5  per  cent  in  supervising  their  compilation. 


A  Typical  Plan  of  Cost  Accounting 

In  considering  the  more  usual  cost  accounting  methods  in 
relation  to  the  above  requirements,  it  is  necessary  for  the  sake 
of  clearness  to  take  some  specific  case  as  a  means  of  illustration 
and  therefore  in  Figure  2  are  shown  the  underlying  principles 
of  a  cost  system  employed  by  a  concern  manufacturing  a  varied 
line  of  standard  machinery,  many  of  the  parts  of  which  are 
common  to  several  machines  and  where  accordingly  parts  are 


21 


(labor] 


(material 


(burden) 


0PERAT0R5TIMECARD 


SORTED   BY     ORDER 

NUMBERS  AND  POSTED 

TO 

PART    COST 

RECORD 

MONTHLY 


MATERIAL  REQUISITION 


PRICED  AT  A  VERA  6E  COS  T 

OF 

MATERIAL     AND 

POSTED  TO 

PART     COST 

RECOnO 


PART     COST   RECORD 


BURDEN  DISTRIBUTION 


ANALYZEDAND 

POSTED 
MONTHLY  TO 

PART 

COST 

RECORD 


CHARGED 
MONTHL  Y  WITH 

LA50R 

MATERIAL  AND 

BURDEN 


CREDITED 

WITH   PARTS 

USED  ON 

M  AVERAGE 

COST    BASIS 


PRICED  ATAVEPA6E 
PR  ICE  ON  PART  COST 
RECORD     AND 

POSTED  MONTHL  Y 
TO  ASSEMSi  Y 

COST      RECORD 


PRICED  AT AVERASE 
COST  OF  MATERIAL 

AND 
POSTED     TO 
ASSEMBLY 
COST     RECORD 


SORTED    BY 
ORDER  NUMBERS 

AND  POSTED 

MONTHL Y 

TO   ASSEMBLY 

COST  RECORD 


ANALYZED 

AND     POSTED 

MONTHLY 

TO 

ASSEMBLY 

COST    RECORD 


ASSEf^SLY  COST  RECORD 


CHARGED 
MONTHLY  WITH 

PARTS, 
MATERIAL 

LABOR 
AND    BURDEN 


CREDITED 

WITH 

ASSEMBLIES 

WITHDRAWN 

AT 

AVERAGE  PRICE 


(labor  ] 


SORTED  EY  O^DER 
NUMBERS  AND 
POSTED  MONTHLY 
TO  FINAL  ASSEMBLY 
COST 
RECORD 


PRICED    AT 

AVERASE  COST 

OF  MATERIAL 

AND 

POSTED  TO  FINAL 

ASSEMBLY  RECORD 


ANALYZEDAND 
POSTED  MONTHLY 
TO  FINAL 
ASSEMBLY 
COST 
RECORD 


PR.'CEOATAVERAGE 
PRICE  CN ASSEMBLY 
COST  RECORD  AND 
POSTED  TO 
FINAL  ASSEMBLY 
COST 


RNAL  ASSEMBLY  COST  RECORD  | 

CHARSED  MONTHLY 

CREDITED 

WITHASSEHBLIES 

MONTHL  Y  WITH 

RAW  MATERIALS 

SHIPMENTS 

LABOR    AND 

AT  AVERAGE 

BURDEN 

PRICE 

Fig.  2. — Diagram  show-ing  essential  features  of  typical  old  style  cost  system  for 
standard  line  of  machinery'. 


S2 

manufactured  for  stock  and  issued  on  assembly  requisitions,  this 
being  a  condition  common  to  manufacturers  of  standardized 
machinery.  It  may  be  mentioned  that  the  plan  illustrated  is 
still  somewhat  generally  regarded  as  an  efficient  method  of  cost 
accounting.  In  considering  this  plan  no  attention  is  given  to 
questions  of  burden  distribution,  etc.,  but  merely  to  the  basic 
method  used  in  the  determination  of  costs. 

Considered  from  the  standpoint  of  the  first  of  the  require- 
ments enumerated  above,  namely,  the  obtaining  of  information 
relative  to  the  cost  of  specific  articles,  it  will  be  seen  that  under 
the  plan  illustrated  a  detailed  account  is  maintained  for  the 
cost  of  each  batch  of  parts  manufactured.  To  the  cost  of  these 
parts  is  charged  the  actual  labor  cost  of  the  work  performed 
thereon  and  the  cost  of  the  material  used.  Burden  is  distributed 
monthly  to  the  cost  of  parts,  part  assemblies  and  final  assemblies. 
Parts  used  in  assemblies  are  charged  to  the  assembly  cost  card 
on  the  basis  of  the  average  cost  of  such  parts  as  shown  by  the 
parts'  cost  card.  The  cost  of  the  assemblies  includes  also  the 
cost  of  assembling  material  used  and  assembling  labor  and 
burden.  The  final  assembly  includes  the  average  cost  of  part 
assemblies  as  shown  by  the  assembly  cost  cards,  assembling  labor, 
material,  and  burden. 

The  system  now  being  considered  is  a  typical  example  of  what 
may  be  termed  historical  cost  accounting  the  scope  of  which  is 
confined  to  the  ascertainment  of  information  relative  to  costs 
actually  realized.  This  being  the  primary  purpose  of  this  sys- 
tem, data  obtained  therefrom  as  to  operating  efficiencies  being 
merely  incidental,  as  explained  later,  the  question  naturally  arises 
as  to  what  is  the  value  and  what  are  the  limitations  of  cost 
records  compiled  after  the  event. 

In  a  business  such  as  that  for  which  the  system  being  described 
was  designed,  it  is  contended  that  information  relative  to  past 
costs  is  of  very  limited  value.  The  manufacture  of  parts  being 
for  stock,  these  parts  being  withdrawn  as  required  for  assem- 
bling, it  will  be  understood  that  it  is  not  only  possible  but  highly 
probable  that  the  parts  included  in  any  machine  represent  the 
result  of  manufacturing  operations  extending  over  a  consider- 
able period  of  time,  so  that  the  final  cost  of  a  machine  will 
represent  a  conglomeration  of  data  involving  material,  labor  and 
burden  figured  at  the  various  prices  extending  over  the  period 
covered  by  the  operations  involved  in  the  manufacture  of  the 
machine.  Such  a  cost  will  in  itself  afford  very  limited  informa- 
tion relative  to  the  current  cost  of  building  a  machine  and  with 


23 

fluctuating  material  prices  and  labor  and  burden  rates  a  manu- 
facturer would  certainly  not  feel  justified  in  accepting  a  cost 
so  compiled  as  the  basis  for  making  a  selling  price.  Even  if 
all  of  the  parts  required  are  actually  on  hand  it  would  seem 
that  the  correct  basis  on  which  to  figure  selling  prices  would 
be  that  of  replacement  cost,  not  actual  cost,  for  in  the  event 
of  a  falling  market  purchasers  would  expect  to  be  given  the 
benefit  of  the  reduced  material  prices  and  correspondingly  the 
manufacturer  should  be  entitled  to  realize  the  profit  resulting 
from  purchasing  material  before  the  rise  in  price. 

The  whole  conception  of  a  cost  system  which  concentrates 
solely  on  the  obtaining  of  data  relative  to  past  results  is  unsound 
and  belongs  to  the  days  when  the  manufacturer  was  satisfied 
if  some  time  after  the  end  of  the  year  his  accountant  presented 
him  with  a  statement  showing  the  annual  net  profits  realized. 
To  be  able  to  operate  a  business  with  the  maximum  degree  of 
safety  and  profit,  before  any  work  is  undertaken  there  should 
be  an  intelligent  estimate  of  what  its  cost  will  be,  this  estimate 
providing  a  standard  of  attainment  and  a  definite  incentive  to 
economical  manufacture. 

Under  the  plan  described,  in  order  to  obtain  reliable  informa- 
tion as  to  current  costs  it  is  necessary  to  refigure  the  costs  already 
compiled,  on  the  basis  of  current  conditions — a  makeshift 
method  for  which  the  system  is  not  adapted  and  one  involving 
a  great  expenditure  of  time  and  considerable  delay. 


The  Difficulty  of  Shifting  Costs  of  Labor  and  Material 

A  system  such  as  is  being  discussed  may  give  fairly  useful 
information  as  to  costs  during  periods  of  a  more  or  less  constant 
condition  of  the  material  and  labor  markets,  but  in  times  of 
flux,  as  at  present,  such  a  system  is  liable  to  prove  a  danger  in 
giving  misleading  information,  which  if  accepted  as  correct  may 
result  in  serious  loss. 

Generally  speaking,  it  would  appear  that  this  system  gives 
little  available  cost  data  except  for  the  purpose  of  valuing  inven- 
tories and,  even  here,  it  may  be  questioned  whether  the  costs 
so  obtained  should  invariably  be  used  for  inventory  purposes. 
Public  accountants  have  adopted  the  principle  of  valuing  raw 
material  in  inventories  at  current  market  price  or  actual  cost, 
whichever  is  the  lower,  but  it  will  be  readily  seen  how  difficult 
it  would  be  under  the  plan  described  to  refigure  the  material 


24 

included  in  work-in-progress  and  finished  machines  on  a  market 
basis,  so  that  in  the  majority  of  cases  the  auditor,  while  adjusting 
the  raw  material  inventory  to  take  care  of  a  fall  in  the  price 
of  raw  material,  will  be  inclined  to  accept  the  work-in-progress 
and  finished  work  at  their  cost  as  shown  on  the  records,  owing 
to  the  difficulty  of  ascertaining  the  difference  between  the  actual 
cost  of  the  material  included  therein  and  the  market  value 
thereof. 

Considered  from  the  standpoint  of  the  second  reasonable 
requirement  of  a  cost  system,  namely,  the  furnishing  of  com- 
plete data  relative  to  manufacturing  efficiencies,  it  must  be  ad- 
mitted that  the  plan  described  fails  totally  to  meet  the  demands. 
Hardly  any  other  result  could  be  expected  when  it  is  considered 
that  the  plan  concentrates  almost  exclusively  on  obtaining  costs 
and  ignores  the  equally  if  not  more  important  question  of  causes. 

The  cost  accounting  methods  generally  followed  are  directed 
to  a  single  purpose.  As  C.  U.  Carpenter  states:  "The  possibility 
of  ascertaining  the  cost  of  an  article  is  often  the  only  thought 
in  the  manufacturer's  mind  when  the  Cost  System  is  mentioned, 
and  is  accordingly  the  only  function  that  is  developed." 


The  Effort  to  Trace  Causes  of  Cost  Increases 

In  a  business  such  as  has  been  described,  a  certain  machine 
or  batch  of  machines  completed  this  month  may  show  an  increase 
in  cost  as  compared  with  a  previous  batch,  and  the  manufac- 
turing executive  will  call  for  information  as  to  the  cause  under- 
lying this  increase.  This  will  result  in  an  interminable  and 
unsatisfactory  investigation — comparisons  of  the  costs  of  the 
individual  parts  will  be  made — this  part  is  charged  to  this  ma- 
chine at  five  cents  more  than  the  previous  charge.  Why?  In 
any  one  part  increases  or  decreases  may  be  due  to  the  combina- 
tion of  a  number  of  causes.  For  instance,  in  the  month  when 
the  part  was  made  the  forge  shop  was  not  very  busy  so  the 
burden  rate  of  that  department  was  increased.  Or  the  work 
was  done  on  a  machine  not  suited  to  it,  owing  to  the  regular 
machine  not  being  available.  The  machine  used  was  more  expen- 
sive to  operate  than  the  regular  machine.  Or  again  there  was 
a  heavy  spoilage  on  that  batch  of  parts  owing  to  an  incompetent 
operator  or  due  to  a  defect  in  the  material. 

The  investigation  of  the  increased  cost  of  the  machine  being 
considered  will  call  for  a  complete  analysis  of  the  costs  of  all 


25 

parts  showing  increases  and  it  may  be  readily  imagined  how 
impossible  it  would  be  to  bring  to  a  focus  informati(Mi  so 
obtained  as  to  increases  in  the  cost  of  several  hundred  parts  and 
probably  five  times  as  many  operations.  Furthermore,  under 
this  plan  of  only  considering  increases  in  costs,  serious  inefficien- 
cies may  be  overlooked  owing  to  these  being  offset  by  the 
elimination  of  previous  inefficiencies  and  consecjuently  the  total 
cost  of  a  part  remains  approximately  the  same  as  before.  In 
addition,  it  may  be  urged  that  comparisons  with  past  costs  though 
having  their  place  and  being  of  value  when  nothing  better  is 
obtainable  are  of  minor  importance  contrasted  with  comparisons 
with  standards  based  upon  what  the  cost  should  be  rather  than 
what  it  was. 

After  a  few  unsatisfactory  investigations  of  this  kind  an 
executive  will  soon  lose  interest  in  obtaining  efficiency  data  from 
an  analysis  of  detailed  costs,  and  the  work  of  the  cost  depart- 
ment will  become  more  or  less  perfunctory  and  resolve  itself 
into  the  somewhat  usual  state  of  affairs  where  a  mass  of  in- 
formation is  compiled  of  which  little  use  is  made. 

It  seems  strange  that  this  method  of  comparison  should  be 
regarded  as  being  at  all  adequate  to  meet  modern  rec|uirements, 
but  in  a  recent  well-regarded  book  on  cost  accounting,  discuss- 
ing the  value  of  a  detailed  system  of  cost  accounting  to  show 
the  reason  for  not  making  a  profit  on  an  order  for  a  machine, 
we  find  the  following: 

But  supposing  that  after  all,  it  was  found  that  we  had  not  made  a 
profit,  but  a  loss  instead.  What  should  be  done  to  discover  the  reason 
for  this  loss? 

The  need  for  a  comprehensive  and  detailed  system  of  production  orders, 
enabling  us  to  ascertain  the  cost  of  each  part  or  component  of  the  machine 
would  be  forced  upon  us.  And  probably  we  should  not  be  satisfied  even 
with  this.  We  should  also  require  to  know  the  separate  cost  of  each 
process  or  operation  on  each  dissimilar  piece.  Thus,  if  the  baseplate  were 
in  question  we  should  want  to  know  the  cost  of  the  metal  contained 
in  it,  the  cost  of  molding,  the  total  foundry  cost;  the  cost  of  planing, 
drilling  and  hole  slotting  and  scraping  the  sides,  and  whatever  other  opera- 
tions were  performed  on  the  baseplate  separately.  Only  by  doing  so,  and 
by  being  in  a  position  to  contrast  such  detail  costs  with  the  costs  of  similar 
pieces  done  on  a  previous  occasion  could  we  conduct  our  business  intel- 
ligently and  safely. 

It  should  be  noted  that  the  author  cjuoted  assumes  that  the 
above  investigation  and  cost  comparison  will  be  undertaken  after 
it  is  discovered  that  a  machine  has  been  sold  at  a  loss  when  it 
should  have  realized  a  profit.    There  are  those  who  may  question 


26 

the  value  of  such  post  mortems,  especially  when  it  is  remembered 
that  in  many  factories  hundreds  of  different  parts,  involving 
thousands  of  separate  operations,  may  be  worked  on  in  a  month. 
Some  information  as  to  efficiencies  is  demanded  by  every 
progressive  works  manager,  so  the  method  of  obtaining  efficiency 
data  by  analyzing  detailed  costs  proving  ineffective,  there  soon 
develops  a  subsidiary  system  from  which  statements  are  pre- 
pared comparing  the  results  obtained  with  more  or  less  arbitrary 
standards.  Among  these  we  may  mention  our  old  friend  the 
ratio  of  so-called  non-productive  labor  to  productive  labor,  which 
when  used  as  a  standard,  results  in  every  foreman  scheming  to 
include  all  labor  under  the  head  of  productive,  regardless  of  its 
real  character. 


The  Fallacy  of  Low  Non-Productive  Labor  Percentage 

This  brings  to  mind  a  case  which  came  to  the  attention  of 
the  author  where  one  factory  was  for  years  held  up  as  an  ex- 
ample to  the  rest  of  the  factories  operated  by  the  same  company 
because  of  its  low  percentage  of  non-productive  labor.  An  in- 
vestigation, however,  disclosed  the  fact  that  in  this  particular 
factory  all  employees  working  in  the  shop,  including  the  fore- 
men, were  reported  as  productive  labor,  whereas  in  the  other 
factories  foremen  were  reported  as  non-productive  labor.  A 
curious  feature  of  such  a  method  of  comparison  is  that  it  entirely 
ignores  the  actual  efficiency  of  operators  so  that  all  that  is 
required  to  enable  a  foreman  to  make  a  most  excellent  showing, 
according  to  this  standard,  is  to  increase  the  productive  payroll 
without  increasing  the  production.  In  an  actual  case  a  foreman 
introduced  an  improvement  in  a  machine  which  resulted  in  one 
man  being  able  to  do  the  work  which  formerly  required  two. 
The  natural  result  in  the  month  when  this  improvement  went 
into  effect  was  an  increase  in  the  ratio  of  non-productive  labor 
to  productive,  for  while  the  non-productive  payroll  remained 
constant  the  productive  labor  was  reduced  and  as  a  consequence 
the  foreman  in  question  was  sent  for  and  solemnly  reprimanded 
for  his  poor  showing! 

Another  favorite  fetish  of  works  managers  is  the  ratio  of 
piece  work  to  day  work.  Where  this  false  ideal  is  most  con- 
sistently regarded  it  will  be  found  that  practically  all  jobs  are 
piece  work,  and  many  cases  have  come  to  the  attention  of  the 
author  where  the  foreman  did  not  have  the  remotest  idea  of 


27 


the  time  a  job  should  take  and  issued  it  to  a  workman  on  an 
hourly  rate  basis.  After  the  completion  of  the  \vt)rk  he  wouKl 
divide  the  man's  earnings  by  the  production,  reporting  the  result 
as  the  piece-work  rate  and  the  man's  earnings  as  piece  work 
instead  of  day  work. 


The  Injustice  of  Per  Pound  or  Per  Piece  Factors 

A  very  usual  form  of  presenting  efficiency  data  is  to  show 
the  departmental  cost  per  pound  or  per  piece  of  the  product 
manufactured,  whereas  in  many  cases  the  variations  in  size  and 
complexity  of  work  cause  legitimate  fluctuations  in  cost  amount- 
ing to  five  times  as  much  as  any  possible  variation  in  efficiency. 
Statements  prepared  on  this  basis  are  more  often  a  source  of 
irritation  than  a  spur  to  efficiency.  A  foreman  is  sent  for 
around  about  the  end  of  the  month  and  told  that  in  the  previous 
month  his  labor  or  tool  expense  per  pound  or  per  piece  was 
so  many  per  cent  over  the  month  previous.  He  immediately 
begins  to  rack  his  brain  for  some  reason  why  this  condition 
arose  and  probably  remembers  some  particular  order  which  gave 
him  trouble  and  hopefully  advances  this  as  a  reason  for  the 
poor  showing.  Of  course,  the  cost  system  does  not  provide 
any  specific  information  as  to  the  causes  underlying  variations 
in  costs  so  that  the  argument  is  more  or  less  ineffective  and 
the  foreman  leaves  the  cost  department  with  a  poor  opinion  of 
the  cost  system  and  with  little  faith  in  any  information  emanating 
therefrom. 

The  author  was  partly  responsible  many  years  ago  for  the 
introduction  of  a  system  under  which  foremen  were  paid  a 
bonus  based  upon  the  decreases  in  costs  per  pound  or  per  piece 
in  their  departments.  Undoubtedly,  this  plan  had  a  good  moral 
effect  but  the  author  now  blushes  to  think  how  the  system  must 
often  have  rewarded  the  inefficient  and  penalized  the  competent. 
Primarily  it  was  wrong,  for  it  based  its  rew^ards  on  comparisons 
with  results  previously  attained  so  that  the  worst  organized 
department  where  savings  could  most  easily  be  effected  was  the 
one  where  the  greatest  rewards  were  possible.  In  fact,  given 
a  department  lOO  per  cent  efficient  at  the  start  it  would  be 
theoretically  impossible  under  this  plan  for  any  bonus  to  be 
earned  at  all.  Again,  any  change  in  the  character  of  work  done 
in  the  department  might  quite  easily  result  in  legitimate  cost 
variations  per  pound  or  per  piece  many  times  offsetting  anv 


28 

possible  variations  resulting  from  fluctuations  in  efficiency. 
Furthermore,  no  distinction  was  made  in  the  case  of  such  items 
as  stores  or  tools  between  increases  and  decreases  in  cost  result- 
ing from  variations  in  the  price  paid  for  stores  and  tools  and 
those  which  were  due  to  fluctuations  in  the  efficiency  of  their 
use.  Under  this  plan  it  would  have  been  perfectly  possible  for 
a  foreman  to  have  earned  a  bonus  because  of  a  tool  saving  in 
his  department,  whereas  more  than  the  total  of  such  saving 
might  have  represented  a  decreased  cost  resulting  from  a  reduc- 
tion in  the  price  of  tool  steel,  the  actual  consumption  of  tools 
per  unit  of  product  having  increased. 

The  method  described  of  showing  information  as  to  the  cost 
of  operating  the  departments  of  a  factory  in  relation  to  standards 
is,  of  course,  based  on  a  perfectly  correct  idea,  and  the  absurdi- 
ties referred  to  were  only  due  to  the  absence  of  proper  standards 
and  of  an  adequate  accounting  mechanism  for  providing  com- 
parisons of  actual  costs  therewith.  The  almost  universal  at- 
tempts which  are  made  to  supplement  the  information  produced 
by  the  detailed  cost  accounting  methods  are,  in  fact,  excellent 
proof  that  the  average  works  manager  realizes  the  shortcomings 
of  the  detailed  cost  system  In  force  and  appreciates  the  fact 
that  unless  costs  are  shown  in  relation  to  some  standard  they 
are  of  little  value  as  a  means  of  increasing  the  efficiency  of 
a  factory. 

A  criticism  which  is  commonly  made  of  the  average  cost 
system  is  the  delay  which  is  experienced  in  furnishing  informa- 
tion to  those  for  whose  benefit  it  is  compiled.  Promptness  in 
furnishing  information  is  the  third  of  the  reasonable  require- 
ments of  a  cost  system,  and  in  the  system  which  is  being  criti- 
cized it  would  be  difficult  to  provide  data  as  to  costs  until  some 
time  after  the  close  of  the  month,  as  it  is  inevitable  under  the 
plan  employed  for  the  bulk  of  the  cost  accounting  work  to  be 
concentrated  in  the  period  immediately  following  the  end  of 
the  month.  The  more  promptly  a  system  discloses  inefficiencies 
the  more  cjuickly  can  the  unfavorable  conditions  be  corrected, 
and  unless  a  system  provides  for  daily  reports  covering  the 
more  important  phases  of  the  manufacturing  operations  it  can 
hardly  be  considered  suitable  to  meet  modern  requirements. 

The  Inelastic  Methods  of  Compiling  Information 

A  fundamental  defect  of  most  cost  accounting  systems  is 
the    inelastic     method     employed     in     compiling    information. 


29 

Original  data,  are  tabulated  in  such  a  manner  that  any  rearrange- 
ment to  meet  any  other  need  than  the  specific  one  for  which 
the  tabulation  was  made  necessitates  a  complete,  laborious 
retabulation  by  hand  of  the  original  data.  By  the  employment 
of  modern  accounting  machinery  in  conjunction  with  a  plan 
scientifically  drawn  up  to  take  advantage  of  the  opportunities 
afforded  thereby  it  is  possible  to  arrange  for  any  combination 
of  original  data  to  be  obtained  promptly,  accurately  and  at  little 
expense. 


The  Defect  of  Lack  of  Focus 

An  outstanding  defect  of  the  system  being  discussed  and  in 
fact  of  practically  all  detailed  cost  systems  is  in  relation  to  the 
fourth  requirement  enumerated,  namely,  the  necessity  of  a  sys- 
tem of  cost  accounting  being  so  designed  as  to  render  it  possible 
to  bring  cost  information  to  a  focus  for  the  benefit  of  the  manu- 
facturing executive.  From  the  comments  already  made  on  the 
particular  plan  described  it  will  be  evident  that  under  such  a 
method  it  would  not  be  possible  to  compile  a  comprehensive 
statement  which  in  a  few  figures  would  provide  the  executive 
with  a  bird's-eye  view  of  the  salient  features  of  the  month's  manu- 
facturing operations.  Executives  who  endeavor  to  make  use 
of  the  information  prepared  for  them  by  their  cost  department 
are  engaged  in  a  constant  struggle  to  extract  the  essential  facts 
necessary  for  their  guidance  in  the  operation  of  the  business 
from  the  mass  of  detailed  data  presented  to  them,  and  it  is 
hardly  strange  that  they  sometimes  wonder  whether  the  time 
and  money  expended  in  maintaining  a  cost  department  is  really 
worth  while. 

Reports  to  executives  should  be  based  on  the  principle  of 
exceptions  and  in  place  of  providing  a  mass  of  detailed  and 
undigested  information  should  be  drawn  up  to  indicate  clearly 
and  unmistakably  w^here  exceptional  or  abnormal  conditions 
exist.  The  manufacturing  executive  should  primarily  be  in- 
terested in  information  showing  the  trend  of  efficiencies  and 
the  reasons  underlying  fluctuations  therein.  An  exactly  opposite 
ideal  is  aimed  at  by  the  recognized  detailed  cost  system  for  the 
basic  purpose  underlying  this  plan  is  to  merge  all  expenses  as 
far  as  possible  into  the  detailed  costs,  so  that  the  more  nearly 
such  a  plan  reaches  its  logical  conclusion  and  the  more  complete 
and  elaborate  the  methods  of  distribution  the  more  inextricably 


30 

are  inefficiencies  buried  in  the  detailed  costs.  In  many  manu- 
facturing concerns  a  serious  cause  of  loss  is  due  to  spoilt  work 
and  the  total  loss  from  this  cause  is  certainly  information  re- 
quired by  the  manufacturing  executive,  but  the  author  has 
examined  numerous  detailed  cost  systems  where  such  losses  only 
showed  on  the  cost  records  as  affecting  the  cost  per  piece  of 
the  parts  spoiled. 


The  Importance  of  Sales  Statistics 

When  its  importance  is  considered,  it  is  a  matter  of  surprise 
that  so  little  attention  relatively  has  been  given  to  the  ciuestion 
of  sales  statistics,  the  fifth  caption  in  the  list  of  recjuirements 
of  a  cost  system.  It  is  true  that  a  great  deal  of  data  is  compiled 
in  many  institutions  covering,  some  phases  of  the  activities  of 
the  selling  organization  and  there  are  in  fact  few  concerns  of 
any  size  that  do  not  possess  records  showing  the  gross  sales 
made  by  each  salesman  and  in  each  territory.  It  is  rarely,  how- 
ever, that  reliable  information  is  obtained  as  to  the  actual  net 
pFofits  earned  by  a  salesman  except  in  those  cases  where  the 
product  is  a  simple  one  and  the  figuring  of  the  profits  corre- 
spondingly easy.  The  direct  result  of  this  lack  of  information 
is  that  even  salesmen  who  are  not  paid  on  commission  strive 
more  toward  obtaining  a  large  volume  of  sales  than  the  realiza- 
tion of  net  profits. 

In  a  business  handling  a  varied  and  complex  product  it  is 
not  feasible,  of  course,  to  obtain  the  somewhat  extensive  line 
of  information  specified  in  the  list  of  requirements  unless  the 
system  of  cost  accounting  has  been  skillfully  designed  with  this 
object  in  mind,  and  original  data  are  compiled  in  such  form  as 
to  render  it  possible  by  the  use  of  accounting  machinery  to 
obtain  expeditiously  and  inexpensively  any  combination  of  in- 
formation required. 

The  actual  money  expended  in  maintaining  any  cost  sys- 
tem has  little  significance  unless  considered  in  relation  to 
the  results  obtained  from  the  operation  of  the  system. 
When  both  factors  of  actual  outlay  and  benefits  received 
are  taken  into  account  it  will  be  found  that  the  average  cost 
system  is  unduly  expensive.  Not  only  is  the  actual  cost  con- 
siderable but  the  results  obtained  are  of  limited  value.  A  detailed 
system  of  cost  accounting  such  as  has  been  described  involves 
a  great  amount  of  clerical  work  not  only  in  the  cost  department 


31 

but  on  the  part  of  the  workmen  making  out  detailed  time  reports. 
In  connection  with  the  latter,  as  will  be  explained  later,  it  is 
often  possible  to  eliminate  a  great  proportion  of  the  clerical 
work  performed  in  the  shops  and  at  the  same  time  very  much 
increase  the  utility  of  the  information  obtained. 

The  relatively  high  cost  of  the  average  detailed  cost  system 
is  largely  due  to  the  immense  volume  of  comparatively  useless 
information  which  is  compiled  and  also  to  defects  in  the  design 
of  the  system,  for  as  previously  stated  a  common  fault  of  many 
cost  systems  is  that  basic  information  is  tabulated  in  such  a 
manner  as  to  render  it  necessary  to  retabulate  this  by  hand  before 
any  rearrangement  of  these  data  can  be  obtained. 


The  Lack  of  Coordination 

Another  cause  of  unnecessary  expense  in  the  operation  of 
a  system  of  cost  accounting  is  the  lack  of  coordination  between 
departments  closely  allied.  This  applies  particularly  to  the  rela- 
tions between  the  cost  and  production  departments  which  gener- 
ally operate  independently  in  the  use  of  the  same  basic  informa- 
tion and  where  there  is  often  found  to  be  considerable  duplication 
of  effort.  As  will  be  demonstrated  in  later  chapters  the  work  of 
these  two  departments  is  so  closely  related  that  it  should  be 
considered  as  a  single  proposition  and  the  two  departments 
combined.  There  are  few  organizations  where  some  loss  is  not 
experienced  as  a  result  of  a  lack  of  proper  coordination  between 
departments  which  should  logically  be  intimately  connected.  An 
extreme  instance  of  this  kind  was  a  case  which  came  to  the 
attention  of  the  author  where  the  general  accounting  and  cost 
accounting  departments  of  a  large  business  were  so  far  divorced 
from  one  another  that  each  of  these  departments  issued  entirely 
distinct  cards  of  account,  this  necessitating  the  analyzing  of  all 
shop  expenses  twice,  once  for  the  general  books  and  once  for 
the  cost  records. 

As  regards  the  cost  of  obtaining  the  very  complete  line  of 
information  detailed  in  the  list  of  reasonable  requirements  of 
a  cost  system  previously  given,  it  may  be  stated  that  in  the 
majority  of  cases  it  is  perfectly  possible  to  operate  a  system 
under  which  these  results  can  be  obtained  at  an  expense  no 
greater,  and  probably  less  than,  that  required  to  maintain  the 
recognized  detailed  cost  systems.  In  some  cases  the  author  has 
been  enabled  to  obtain  the  results  desired  at  a  verv  great  saving 


32 

over  the  expense  previously  incurred,  but  in  any  event  it  may 
be  stated  that  the  expense  involved  in  operating  an  accounting 
plan  properly  designed  to  apply  the  principles  of  scientific  man- 
agement is  comparatively  small  considered  in  relation  to  the 
scope  and  value  of  the  information  obtained. 

Dealing  with  the  last  of  the  requirements  enumerated,  namely, 
the  importance  of  complete  standard  practice  instructions  cover- 
ing the  operation  of  a  system  of  cost  accounting,  it  has  been 
found  by  the  author  that  even  in  large  undertakings  there  is  a 
lamentable  lack  of  such  instructions.  In  fact,  it  is  only  occa- 
sionally that  a  case  is  found  where  the  methods  employed  have 
been  seriously  and  systematically  analyzed  and  studied  with  a 
view  to  eliminating  duplication  of  work  and  improving  the 
methods  generally. 

The  lack  of  comprehensive  instructions  and  detailed  plans 
covering  the  operation  of  a  system  in  its  entirety  is  a  source 
of  considerable  weakness  to  the  average  organization.  This 
condition  renders  a  business  entirely  too  dependent  upon  the 
specialized  knowledge  of  individuals  and  further  holds  back 
the  development  of  the  junior  members  of  the  organization  by 
limiting  their  horizon  to  the  performance  of  their  specific  duties. 
With  complete  standard  practice  instructions,  however,  not  only 
is  the  danger  of  having  work  done  incorrectly  owing  to  the 
absence  of  definite  written  instructions  eliminated,  but  further- 
more, when  the  plan  of  a  system  in  its  entirety  is  properly 
presented  each  member  of  the  organization  is  assisted  in  seeing 
his  particular  work  in  its  correct  perspective.  To  an  ambitious 
employee  diagrams  illustrating  the  routine  work  of  the  organi- 
zation can  be  of  great  value — not  only  do  they  render  it  possible 
for  him  to  perform  his  immediate  duties  with  a  more  intelligent 
understanding  of  their  significance,  but  they  also  enable  him  to 
study  the  work  of  other  members  of  the  organization  so  that 
when  the  day  of  opportunity  comes  he  is  ready  to  take  advantage 
of  it. 

The  Importance  of  standard  practice  Instructions  Is  being 
increasingly  recognized  in  the  field  of  shop  practice,  but  in  the 
sphere  of  cost  accounting  this  and  other  principles  of  scientific 
management  have  been  in  a  large  measure  neglected.  In  the 
author's  opinion,  however,  the  day  is  fast  approaching  when  as 
much  attention  will  be  given  to  the  application  of  these  principles 
in  the  cost  department  as  in  the  shop. 


Chapter  II 
STANDARDS    AND    STANDARD    COSTS 

THE  use  of  standards  by  the  human  race  dates  back  to  the 
early  dawn  of  civilization.  The  sparks  made  by  a  stone- 
age  savage  in  chipping  a  flint  arrow-head  falhng  upon  some 
dry  grass  and  setting  fire  to  it  resulted  in  the  adoption  of  a 
standard  method  of  producing  fire,  which  was  very  little  changed 
until  the  lucifer  match  was  substituted  for  the  flint  and  tinder 
of  our  forefathers'  time.  The  savage  who  tiring  of  the  effort 
involved  in  killing  fish  by  means  of  a  spear  and  who  using 
guile  in  place  of  force  took  advantage  of  the  greediness  of  his 
prey  and  made  a  primitive  hook  by  lashing  a  piece  of  curved 
shell  with  fibre  to  a  piece  of  bone  or  wood,  introduced  a  standard 
method  of  catching  fish,  the  principle  of  which  is  identical  to 
that  followed  by  the  modern  angler. 

The  forward  march  of  civilization  has  only  been  rendered 
possible  by  the  adoption  of  standards.  Standards  passed  on 
from  father  to  son  and  from  generation  to  generation  represent 
the  ratchets  on  the  wheels  of  progress,  and  have  enabled  each 
forward  step  painfully  and  slowly  made,  to  be  maintained. 
Without  the  privilege  of  drawing  on  the  accumulated  experience 
of  the  race  as  represented  by  its  standards,  each  individual  would 
be  compelled  to  start  at  the  beginning  and  progress  would  have 
been  impossible. 

Whereas  the  savage  had  very  few  and  simple  standards,  as 
civilization  developed  standards  increased  in  tremendous  degree 
both  as  regards  number  and  complexity,  and  in  modern  life  the 
standards  covering  the  multitudinous  activities  of  human  kind 
are  of  incalculable  number. 

In  dealing  with  the  subject  of  cost  accounting  we  are  in- 
terested only  in  standards  so  far  as  they  concern  industrial 
life  and  here  at  the  outset  we  are  confronted  with  the  fact 
that  it  is  possible  to  have  many  standard  ways  of  doing  the 
same  thing.  Until  recent  years  the  standards  followed  by  the 
various  trades  were  largely  rule-of-thumb  or  traditional  knowl- 
edge and  as  Mr.  Taylor  stated  in  "The  Principles  of  Scientific 

33 


34 

Management"  "Instead  of  having  only  one  way  which  is 
generally  accepted  as  a  standard,  there  are  in  daily  use,  say, 
fifty  or  a  hundred  different  ways  of  doing  each  element  of 
the  work." 

False  Ideals  and  Standards 

In  the  management  end  of  industry  we  also  find  a  variety 
of  standards  or  ideals,  many  of  which  are  wholly  false  or  at 
most  only  partly  true.  In  some  concerns  the  main  standard 
appears  to  be  a  large  tonnage  and  where  this  idea  is  most  ram- 
pant, time  and  time  again  it  will  be  found  that  at  the  close  of 
the  month  light  but  highly  profitable  work  will  be  relentlessly 
side-tracked,  no  matter  how  urgently  recjuired  by  the  customer, 
in  order  to  manufacture  some  relatively  unprofitable  but  heavy 
material  for  which  there  is  no  immediate  demand  but  which  will 
enable  the  month's  tonnage  production  to  appear  in  a  favorable 
light  to  the  directors.  We  are  all  familiar  with  the  wild  scramble 
in  many  shipping  rooms  at  the  close  of  the  month  to  get  out 
as  many  goods  as  possible  in  order  to  swell  the  month's  ship- 
ments and  it  would  be  difficult  to  estimate  the  number  of  mis- 
takes which  are  a  result  of  this  somewhat  misguided  enthusiasm, 
due  to  the  setting  up  of  a  false  or  at  least  an  inadecjuate  ideal 
or  standard. 

Reference  has  previously  been  made  to  other  false  ideals  or 
standards  common  to  manufacturing  institutions,  such  as  at- 
tempting to  realize  as  high  a  percentage  as  possible  of  piece  work, 
or  of  so-called  productive  labor,  but  while  such  standards  are 
to  some  extent  founded  upon  knowledge  gained  from  practical 
experience  they  present  a  dangerous  tendency  to  grasp  at  the 
shadow  and  lose  the  substance.  This  is  particularly  so  as  regards 
the  introduction  of  piecework  rates  on  a  large  scale  without 
proper  consideration. 

The  fundamental  idea  underlying  scientific  management  is 
the  substitution  of  definite,  scientifically  determined  standards 
for  all  these  nebulous  ideals,  and  clearly  defined  methods  of 
reaching  these  standards  instead  of  haphazard  and  rule-of-thumb 
methods.  This  obviously  applies  to  all  phases  of  scientific  man- 
agement such  as  time  and  motion  study,  standard  practice  in- 
structions and  planning  and  dispatching  methods. 

It  is  the  province  of  the  engineer  to  determine  the  standards 
for  use  in  the  shops  and  to  provide  for  proper  methods  to  be 
adopted  for  the  realization  of  these  standards. 


35 


In  view  of  the  complexity  and  number  of  standards  employed, 
it  is  obvious  that  some  means  must  be  provided  for  showing 
the  extent  to  which  the  results  actually  obtained  conform  to 
the  standards  set  up,  and  this  demands  the  maintenance  of 
records.     It  is  the  province  of  the  accountant  to  provide  and 


carr}'  along  such  records. 


The  Division   of  Responsibilities  of   Operating  and 
Accounting  Divisions 

It  would  seem  well  at  this  point  to  emphasize  the  importance 
of  a  correct  division  between  the  responsibilities  of  the  operating 
and  cost  divisions  as  regards  the  design  and  operation  of 
the  cost  system,  for  there  is  probably  no  problem  of  organi- 
zation concerning  which  such  varied  views  are  held  as  this. 
Some  accountants  take  the  extreme  view  that  the  factory  organ- 
ization should  have  nothing  to  say  as  regards  the  cost  system 
and  should  be  absolutely  dependent  upon  the  judgment  of  the 
cost  accountant  as  to  the  extent  and  character  of  the  cost 
information  to  be  furnished  the  factory.  On  the  other  hand 
there  are  factory  executives  who  regard  the  compilation  of 
cost  information  as  being  purely  a  shop  proposition  and  who 
operate  cost  systems  which  are  entirely  independent  of  the  gen- 
eral accounting  system.  It  would  not  be  difficult  to  prove  that 
the  standpoint  of  each  of  these  classes  of  extremists  is  an 
incorrect  one — there  can  be  no  justification  for  the  attitude  of 
those  accountants  who  regard  the  cost  system  as  being  merely 
an  appendage  of  the  financial  department  and  it  is  this  restricted 
viewpoint  of  many  accountants  which  has  done  more  to  dis- 
credit cost  methods  generally  in  the  shops  than  probably  any 
other  factor  and  has  called  forth  such  criticisms  as  the  following 
made  by  the  late  ]\Ir.  Gantt  when  he  said: 

Most  of  the  cost  sj-stems  in  use  and  the  theories  on  which  thej'  are 
based  have  been  devised  bj'  accountants  for  the  benefit  of  financiers  whose 
aim  has  been  to  criticize  the  factorj^  and  make  it  responsible  for  the 
shortcomings  of  the  business.  In  this  they  have  succeeded  admirably — 
largely  because  the  methods  used  are  not  so  devised  as  to  enable  the 
superintendent  to  present  his  side  of  the  case. 

It  is  doubtless  this  arbitrar\-  and  narrow-minded  attitude  of 
many  accountants  that  has  caused  some  factory  executives  to 
swing  to  the  other  extreme  and  regard  the  cost  system  as  coming 
solely  within  the  province  of  the  operating  division.  As  J\lr. 
Franklin  states: 


36 

While  the  accuracy  of  unit  order  of  article  cost  may  not  be  absolute, 
the  cost  of  total  product  can  and  should  be  proved  absolute.  This  can 
be  done  only  by  connecting  it  with  the  accounting  or  bookkeeping  methods. 
.  .  .  Any  plant  without  such  connection  has  clearly  not  understood  the  cost 
problem. 

No  factory  superintendent  of  real  calibre  would  wish  however 
to  be  bothered  with  the  responsibility  of  a  cost  system  if  while 
being  relieved  of  this  he  could  be  assured  that  all  reasonable 
requirements  which  he  might  make  of  the  accounting  division 
for  information  would  be  satisfactorily  met,  and  accountants 
have  only  themselves  to  thank  in  most  cases  for  encroachments 
on  their  territory.  The  function  of  the  cost  department  is  purely 
that  of  service  to  the  administration,  selling,  financial,  and  manu- 
facturing divisions  of  the  business,  and  no  system  of  cost  ac- 
counting can  be  considered  as  completely  meeting  the  require- 
ments of  modern  industry  unless  it  meets  all  reasonable  demands 
of  these  divisions  as  regards  furnishing  prompt,  accurate,  and 
comprehensive  information  as  to  the  operation  of  the  business. 
Fortunately  it  is  possible  to  draw  a  clear  and  logical  line  of 
demarcation  between  the  functions  of  the  operating  and  account- 
ing divisions  in  connection  with  a  system  of  standard  cost  ac- 
counting, their  relations  to  the  system  and  to  one  another  in 
connection  therewith  being  definable  as  outlined  in  the  following 
paragraphs. 


The  Function  of  the  Operating  Division 

It  is  the  function  of  the  operating  division  to  set  the  standards 
which  will  be  used  as  the  basis  of  the  cost  system,  to  determine 
for  instance  the  capacity  of  the  different  producing  departments, 
to  furnish  information  relative  to  the  standard  routings  followed 
by  the  product,  to  set  time  standards  for  the  performance  of 
manufacturing  operations,  to  determine  the  number  of  pounds 
of  steam  which  should  be  produced  from  a  pound  of  coal,  etc., 
and  in  brief  to  set  standards  for  all  manufacturing  operations. 

It  is  also  the  function  of  the  operating  division  to  fully  advise 
the  accounting  division  of  its  requirements  in  connection  with 
cost  information.  The  operating  division  should  likewise  furnish 
such  reports  and  information  as  are  necessary  for  the  operation 
of  the  system.  It  is  not  liowcver  the  function  of  the  operating 
division  to  design  accounting  systems  or  forms  independently  of 
the  accounting  division. 


37 


The  Function  of  the  Accounting  Division 

It  is  the  function  of  the  accounting  division  to  cooperate  with 
the  operating  division  in  connection  with  the  compilation  of 
standard  data  to  the  extent  of  furnishing  information  obtainable 
from  the  records  of  the  cost  department.  It  is  further  the 
duty  of  the  accounting  division  to  perform  such  purely  clerical 
work  in  connection  with  standards  as,  for  instance,  classifying 
the  standard  data  furnished  by  the  operating  division  in  such 
form  as  to  meet  the  reciuirements  of  the  accounting  division. 
It  is  furthermore  the  duty  of  the  accounting  division  to  compile 
schedules  fully  covering  the  information  it  desires  the  operating 
division  to  furnish. 

The  actual  designing  of  the  cost  system  and  the  drawing  up 
of  forms  and  standard  practice  instructions  in  connection  there- 
with is  solely  and  absolutely  a  function  of  the  accounting  division 
and  of  its  professional  advisers. 

It  is  the  function  of  the  accounting  division,  as  far  as  is  con- 
sistent with  sound  accounting  and  business  principles,  to  meet 
the  desires  of  the  operating  division  as  regards  the  character 
of  the  cost  information  to  be  furnished  and  the  form  in  which 
such  information  is  to  be  presented. 

It  is/the  function  of  the  accounting  division  to  maintain  com- 
plete records  covering  the  cost  of  all  operations — to  carry  such 
records  both  at  actual  cost  and  in  relation  to  the  standards 
determined  by  the  operating  division,  and  also  to  analyze  the 
differences  between  actual  and  standard  cost  by  causes  and  to 
render  periodical  statements  to  the  operating  division  in  the 
form  agreed  upon  and  at  the  times  set.  For  instance,  it  is 
the  function  of  the  accounting  division  to  advise  the  operating 
division  as  to  the  extent  of  an  increase  in  cost  owing  to  less 
than  the  standard  number  of  pounds  of  steam  per  pound  of 
coal  being  produced,  to  an  increase  in  the  purchase  price  of 
coal  or  in  the  time  consumed  in  manufacturing  operations — in 
brief  to  advise  the  operating  division  of  all  divergences  from 
standard  and  the  cause  of  such  variations  as  disclosed  by  the 
cost  records.  It  is  not,  however,  tJie  function  of  the  accounting 
division  to  set  operating  standards. 

The  above  remarks  relative  to  the  respective  authorities  and 
responsibilities  of  the  accounting  and  operating  divisions  do  not 
represent  merely  arbitrary,  personal  rulings.  The  division  there 
made  is  based  upon  fundamental  principles.     To  take   for  in- 


38 

stance  the  statement  as  regards  the  design hig  of  cost  systems 
and  forms  being  purely  the  function  of  the  accounting  division. 
A  system  of  cost  accounting  is  analogous  to  a  machine,  in  fact, 
it  is  a  machine  for  the  production  of  cost  information.  A 
machine  represents  an  arrangement  of  parts  coordinated  to  give 
the  results  required  with  the  minimum  expenditure  of  power 
and  loss  of  friction.  Obviously,  in  the  design  of  a  machine  the 
designer  must  have  in  mind  not  only  the  individual  functions 
of  the  respective  parts  but  also  the  relation  between  these  parts 
and  the  machine  or  system  as  a  whole.  To  attempt  to  have 
some  parts  designed  by  one  individual  with  a  viewpoint  largely 
restricted  to  the  function  of  these  particular  parts  without  refer- 
ence to  the  machine  as  a  whole,  and  other  parts  designed  by 
some  other  person  similarly  situated  cannot  but  result  in  the 
system  being  lacking  in  coordination  and  proving  less  satisfac- 
tory in  operation  than  would  be  the  case  if  the  basic  principles 
of  designing  had  been  followed.  Failure  to  conform  to  these 
principles  invariably  results  in  the  operating  and  accounting  divi- 
sions duplicating  information,  in  unnecessary  expense  and  con- 
stant irritation. 

The  statement  that  it  is  not  part  of  the  functions  of  the 
accounting  division  to  determine  standards  also  calls  for  little 
argument  in  its  support.  Such  standards  as  the  accounting  divi- 
sion would  be  in  a  position  to  set  must  necessarily  be  largely 
based  upon  records  of  past  experiences,  and  though  data  as  to 
past  performances  are  of  interest  and  of  value  in  determining 
the  trend  of  costs,  such  data  are  not  suitable  for  use  as  standards 
in  the  sense  in  which  this  term  is  used  in  this  book.  The  setting 
of  cost  standards  calls  for  engineering  and  operating  experience 
which  the  accountant  per  se  is  not  often  in  a  position  to  obtain, 
but  in  any  event  if  he  should  possess  such  experience  in  any 
degree  this  is  merely  incidental  and  does  not  bring  the  setting 
of  standards  within  the  domain  of  the  functions  of  the  account- 
ing division. 

In  large  manufacturing  businesses,  the  author  has  found  that 
most  satisfactory  results  can  be  obtained  by  placing  in  the  cost 
department  a  representative  of  the  operating  department  who 
forms  a  link  between  the  accounting  and  operating  divisions  and 
whose  main  functions  are  to  supervise  the  compilation  of  stand- 
ards and  to  ensure  that  cost  and  efficiency  information  produced 
by  the  cost  department  is  given  proper  attention  by  the  operating 
division.    He  also  acts  as  an  interpreter  of  the  cost  figures. 


39 


The  Relatiox  of  Standards  and  Records 

Standards  and  records  are  as  inseparable  ideas  as  latitude 
and  longitude,  debit  and  credit,  east  and  west.  Standards  with- 
out records  are  as  ineffective  as  firing  at  a  target  would  be  if 
the  marksman  had  no  means  of  determining  whether  he  was 
making  hits  or  not,  and,  vice-versa,  records  withinit  standards 
would  be  equivalent  to  carefully  recording  the  result  of  every 
shot  but  giving  the  marksman  no  definite  target  at  which  to 
aim.  With  standards  and  no  records  we  are  in  the  position 
of  a  traveller  with  a  time  table  and  no  watch,  while  conversely 
with  records  without  standards  we  are  in  the  position  he  would 
be  with  a  watch  but  no  time  table. 

A  very  common  illustration  of  standards  without  records  is 
presented  by  the  concerns  who  issue  many  rules  and  instructions 
but  proAide  no  systematic  method  of  ascertaining  whether  such 
instructions  are  followed,  with  the  inevitable  result  that  they 
are  "more  honor'd  in  the  breach  than  the  observance,"  and  in 
the  innumerable  systems  which  are  operated  in  a  way  far  dif- 
ferent from  that  originally  intended.     As  INIr.  Gantt  states: 

!Many  shops  have  a  very  nice  schedule  system ;  they  plan  their  work 
beautifully — at  least,  it  looks  very  pretty  on  paper,  but  they  have  no  means 
of  finding  out  whether  those  schedules  are  lived  up  to  or  not.  Usually 
they  are  not. 

The  majority  of  cost  accounting  systems  are  representative 
of  records  without  standards  with  the  result  that  a  great  pro- 
portion of  the  information  compiled  is  meaningless  and  value- 
less, as  the  data  obtained  not  being  shown  in  relation  to  any 
standard  of  attainment  are  largely  without  significance. 

A  further  illustration  of  the  use  of  records  without  standards 
is  that  of  the  riian  who  keeps  the  most  minutely  detailed  account 
of  his  personal  expenditures,  but  has  no  budget.  The  result 
is  that  having  no  definite  scheme  of  saving,  his  accounts  do  not 
materially  aid  him  in  this  connection,  but  merely  provide  him 
with  the  sad  history  of  where  his  money  went. 

Numerous  illustrations  of  standards  combined  with  records 
present  themselves  among  which  may  be  mentioned:  taximeters 
which  show  the  actual  amount  earned  figured  at  a  standard 
rate  for  a  certain  distance;  the  time  book  on  which  a  red  line 
is  ruled  at  the  opening  hour,  all  persons  signing  above  the  red 
line  being  on  time  and  all  under  late ;  or  the  recording  time  clock 


40 

which  shows  in  printed  red  ink  figures  all  cases  of  tardy  arrivals, 
or  variations  from  standard.  The  budget  systems  of  finance 
when  properly  carried  out  are  perfect  examples  of  the  effective- 
ness of  combining  standards  and  records,  the  standards  being 
the  appropriations  made  for  the  various  purposes  and  the  records 
showing  the  extent  to  which  the  actual  payments  made  conform 
to  these  standards. 

The  average  office  affords  an  illuminating  illustration  of 
operations  being  performed  with  neither  standards  nor  records. 
In  many  offices  those  in  charge  have  but  the  vaguest  idea  of 
the  volume  of  work  which  should  be  performed  in  a  day  and 
maintain  no  records  showing  the  work  done  by  individuals,  with 
the  result  that  office  help  generally  is  notoriously  inefficient.  The 
average  office  employee  adjusts  his  pace  to  meet  the  immediate 
demands  upon  him  as  represented  by  the  work  ahead.  The 
author  calls  to  mind  a  case  which  came  to  his  experience  where 
in  a  seasonal  business  the  sales  in  three  months  of  the  year 
aggregated  as  much  as  in  the  remaining  nine  months,  yet  in 
spite  of  the  very  small  amount  of  work  requiring  to  be  per- 
formed by  the  bookkeepers  during  the  slack  months  they  ap- 
peared just  as  busy  as  during  the  heavy  shipping  season. 

The  application  of  the  principles  of  standards  to  cost  account- 
ing necessitates  the  predetermination  of  costs — that  nothing 
should  be  undertaken  without  its  cost  having  been  calculated 
in  advance.  It  changes  the  whole  viewpoint  of  cost  accounting 
from  retrospection  to  prospection. 

Can  Costs  Be  Predetermined? 

The  argument  may  be  advanced  that  it  is  not  possible  to 
predetermine  costs,  particularly  in  jobbing  shops  and  industries 
manufacturing  a  non-standardized  product,  but  any  doubts  that 
the  reader  may  have  in  this  connection  should  be  dispelled  by 
the  testimony  of  Mr.  W.  B.  Ferguson,  who  in  his  valuable  book 
"Estimating  the  Cost  of  Work"  demonstrates  the  feasibility  of 
predetermining  costs  in  so  difficult  a  class  of  work  in  this  respect 
as  that  of  ship  repairing. 

In  an  article  appearing  in  Tlic  Journal  of  The  American 
Society  of  Mechanical  Engineers  on  the  relation  between  produc- 
tion and  costs  the  late  Mr.  Gantt  made  the  following  statement 
relative  to  the  feasibility  of  predetermining  costs: 

...  it  should  be   possible    for  a  manufacturer   to   calculate  just  what 


41 

plant  and  equipment  he  ought  to  have,  and  what  the  staff  of  officers  and 
workmen  should  be  to  turn  out  a  given  product. 

If  this  can  be  correctly  done,  the  exact  cost  of  a  product  can  be 
predicted.  Such  a  problem  cannot  be  solved  by  an  accountant  of  the  usual 
type,  but  is  primarily  a  problem  for  an  engineer,  whose  knowledge  of 
materials  and  processes  is  essential   for  its  solution. 

Having  made  an  attempt  to  solve  a  problem  of  this  type,  one  of  the 
most  important  functions  we  need  a  cost  system  to  perform  is  to  keep 
the  superintendent  continually  advised  as  to  how  nearly  he  is  realizing 
the  ideal  set,  and  to  point  out  where  the  shortcomings  are. 

The  strongest  objection  to  this  method  of  cost  accounting 
will  probably  come  from  cost  accountants  lacking  the  practical 
experience  necessary  to  estimate  the  cost  of  work,  but  as  sug- 
gested in  the  quotation  just  given  it  is  not  the  province  of  the 
accountant  to  set  up  standards,  it  is  primarily  that  of  an 
engineer  or  an  experienced  shop  man  working  in  conjunction 
with  the  accountant. 

Even  though  there  may  be  cases  where  sometimes  it  is  difficult 
to  obtain  a  very  accurate  estimate  of  the  cost  of  doing  any  work 
it  is  contended  that  any  estimate  carefully  made  is  far  better 
than  none  at  all.  It  at  least  gives  some  incentive  to  work  to. 
In  cases  where  bids  are  made  for  contracts,  there  is  no  argument 
as  to  the  necessity  for  predetermining  costs,  and  this  rule  applies 
in  any  case  where  the  price  is  made  in  advance. 

It  is  of  course  a  well-known  fact  that  the  cost-plus  method  of 
remunerating  contractors  was  extensively  employed  by  the  gov- 
ernment in  the  construction  of  war  camps  and  war  plants.  In  a 
recent  article  in  the  New  York  Tribune  it  was  stated  that  this 
system  was  adopted  ''because  of  the  necessity  for  haste  in  the 
construction  of  war  establishments  and  because  of  fluctuating 
cost  of  materials  and  labor,  which  would  have  made  contractors 
reluctant  to  assume  obligations  involving  millions  of  dollars  on 
their  own  accoinit.  .  .  .  By  this  system  the  government  furnished 
everything  and  paid  all  costs,  depending  upon  the  contractor  to 
do  the  work  efficiently  and  expeditiously  and  with  as  much 
economy  as  possible." 

It  would  be  difficult  to  conceive  of  any  system  more  perfectly 
adapted  to  defeat  the  purposes  enumerated  than  the  cost-plus 
plan  which  in  offering  a  premium  for  incompetency  and  waste 
is  obviously  fundamentally  unsound.  That  the  system  would 
result  in  appalling  waste  was  inevitable  and  that  it  did  so  is  now 
a  matter  of  history.  In  this  connection  the  following  from  the 
article  alreadv  mentioned  is  illuminating: 

"Army  training  camps  cost  the  government  $1,200,000,000. 


42 

Contractors  net  profits  were  about  $22,000,000.  Sworn  testi- 
mony after  the  armistice  elicited,  for  example,  at  Camp  Grant, 
that  there  was  reckless  'cost-plus'  construction.  Four  thousand 
carpenters  were  hired  where  2,000  would  have  sufficed  and  would 
have  completed  the  work  possibly  in  less  time  at  less  cost.  Labor- 
ers were  paid  60  cents  an  hour,  and  when  discharged  as  ineffi- 
cient were  rehired  as  carpenters  at  $9.60  a  day.  Cement  and 
nails  were  ruined  in  great  quantity  by  weather.  Workmen  loafed 
and  at  the  end  of  the  day  would  throw  their  tools  in  the  mud, 
receiving  new  tools  upon  request. 

"At  Camp  Sherman,  Chillicothe,  Ohio,  evidence  elicited  that 
hospital  plumbers  loafed  and  gambled  through  weather  28  de- 
grees below  zero,  while  soldiers  contracted  pneumonia  and  died 
in  great  numbers.  Joseph  E.  Poole,  who  had  been  employed 
at  Camp  Sherman,  testified  that  nurses  and  doctors  clad  in  sheep- 
skin and  fur  coats  attended  sick  soldiers  lying  in  frigid  buildings 
because  the  steamfitters  refused  to  work  on  the  heating  system, 
and  loafed  in  order  to  make  the  job  last  longer  and  the  pay 
greater." 

The  cost-plus  plan  was  the  line  of  least  resistance  and  was  in 
some  measure  rendered  necessary  by  the  fundamental  defects 
underlying  the  common  conception  of  cost  accounting  principles. 
The  argument  advanced  above  that  it  was  necessary  to  adopt 
this  plan  "because  of  fluctuating  cost  of  materials  and  labor"  is 
absurdly  inadequate  when  we  consider  that  "the  government 
furnished  everything."  The  price  of  nails  may  fluctuate  but  not 
the  number  of  pounds  of  nails  necessary  to  construct  a  building 
according  to  specifications — the  hourly  rate  for  carpenters  may 
vary  but  the  number  of  nails  a  carpenter  should  be  expected  to 
drive  in  a  day  is  not  dependent  upon  the  price  of  labor. 

If  instead  of  being  rewarded  in  direct  ratio  to  their  inefficiency 
the  contractors  had  been  paid  a  fixed  amount  for  their  services 
plus  a  substantial  bonus  for  speed  and  economy  in  the  use  of 
material  and  labor  the  country  would  have  been  saved  untold 
millions.  Any  engineer  will  testify  that  it  would  have  been  pos- 
sible to  have  very  closely  figured  the  labor  and  material  recjuired 
to  construct  the  camps  and  certainly  no  very  great  difficulty  would 
have  been  experienced  in  instituting  systems  of  cost  accounting 
which  would  have  clearly  shown  how  closely  the  contractor 
adhered  to  the  standards  set  and  how  much  bonus  he  was  entitled 
to  for  handling  the  work  economically. 

Of  course,  to  some  extent  predetermined  costs  are  used  in 
all  manufacturing   concerns  of   any  magnitude,    this   applying 


43 

particularly  to  plant  improvement  work  where  it  is  the  usual 
practice  to  make  an  appropriation  Ijasecl  upon  the  estimate  of 
the  man  in  charge  of  the  work.  Any  plant  manager  can  testify 
as  to  the  difference  in  the  manner  in  which  construction  work 
will  be  handled  when  there  is  a  definite  cost  figured  in  advance 
and  the  engineer  in  charge  held  accountable  for  keeping  to 
the  figure  of  the  appropriation,  and  where  there  is  no  standard 
fixed  and  no  incentive  to  keep  the  cost  to  any  definite  figure. 

This  principle  applied  to  all  work  performed  will  have  the 
same  effect  as  regards  economical  manufacturing.  In  a  concern 
where  standard  costs  are  used,  instead  of  working  haphazardly 
toward  more  or  less  nebulous  ends,  every  member  of  the  organ- 
ization is  provided  with  definite  incentives,  responsibilities,  and 
records  of  accomplishment. 

In  the  majority  of  standardized  industries  such  as  that  of 
the  manufacture  of  automobiles,  the  price  of  the  article  to  be 
sold  is  often  set  long  before  it  is  manufactured  in  sufficient 
quantities  to  enable  compiled  detailed  costs  to  be  a  guide  to 
the  cost  under  quantity  production  conditions.  Often  the  price 
of  an  article  is  set  immediately  the  experimental  model  has  been 
approved. 


Standard  Costs  the  Fundamental  Improvement 

The  author  joins  issue  with  Benjamin  A.  Franklin's  statement 
that  the  installation  of  adequate  methods  of  cost  accounting 
is  the  basic  and  fundamental  factory  improvement.  The  in- 
troduction of  a  system  of  standard  or  predetermined  costs 
should,  in  the  author's  opinion,  precede  the  introduction  of 
scientific  management  in  the  shop,  such  as  in  the  installation 
of  methods  of  planning  and  dispatching.  This  particularly 
applies  to  those  organizations  where  the  will  to  be  efficient  is 
not  fully  developed,  for  the  operation  of  a  cost  system  along 
the  lines  mentioned  will  to  a  large  extent  of  itself  force  upon 
such  an  organization  the  necessity  for  adopting  the  correct  view- 
point and  scientific  management  methods. 

Once  such  a  system  of  accounting  is  installed,  the  work  of 
the  efficiency  engineer  is  greatly  facilitated,  and  he  can  then 
introduce  his  changes  gradually  and  with  the  full  knowledge  that 
the  accounting  system  will  at  all  times  enable  him  to  determine 
the  extent  to  which  his  work  is  successful.  The  substitution 
of  the  scientificallv  calculated  standards  of  the  engineer  for  the 


44 

more  or  less  arbitrary  standards  previously  in  force  will  present 
no  particular  problem. 

Just  as  electricity  is  a  standard  form  of  power  the  uses  of 
which  are  universal  and  far-reaching,  so  are  scientific  standards 
of  operation  of  manifold  usefulness.  In  brief,  standard  costs 
serve  the  following: 

1  The  foundation  for  setting  selling  prices 

2  The  incentive  to  manufacture  for  the  price  set 

3  A  gage  of  efficiency  in  manufacturing 

4  A  gage  of  selling  efficiency 

5  A  common  unit  of  measurement  so  that  all  cost  informa- 

tion can  be  brought  to  a  focus 

By  their  scientific  employment  standard  costs  can  be  made 
to  give  results  not  possible  in  systems  where  they  are  not  used. 
For  instance,  in  a  concern  manufacturing  a  line  of  standard 
machines  it  is  possible  to  adjust  a  standard  cost  to  the  basis 
of  actual  conditions  with  great  facility. 

The  advantage  of  having  some  common  unit  of  comparison 
for  cost  purposes  will  be  evident  to  any  manufacturer  who  has 
endeavored  to  bring  to  a  focus  the  information  presented  to 
him  by  his  cost  department.  This  ideal  is  easily  realized,  of 
course,  in  the  case  of  the  manufacturer  of  a  simple  product, 
such  as  cement,  where  all  cost  data  are  naturally  given  in  rela- 
tion to  the  number  of  barrels  of  cement  manufactured — labor 
so  much  a  barrel,  repairs  so  much,  power  so  much  and  material 
so  much.  By  the  use  of  standard  costs,  however,  the  cost  state- 
ment of  a  manufacturer  of  a  line  comprising  several  hundred 
machines,  thousands  of  parts  and  tens  of  thousands  of  opera- 
tions can  be  expressed  as  simply  as  those  of  the  cement  manu- 
facturer, all  costs  being  shown  in  relation  to  a  common  unit  of 
measurement,  namely,  the  dollar  of  standard  cost. 


Cost  Accounting  and  Labor 

Though  it  obviously  does  not  come  within  the  province  of 
a  treatise  on  cost  accounting  to  deal  exhaustively  with  the  ques- 
tion of  the  relations  between  capital  and  labor,  cost  accounting 
methods  are  so  intimately  bound  up  with  the  conduct  of  indus- 
trial affairs  that  no  v/ork  treating  of  cost  accounting  as  a  con- 
structive force  can  be  considered  in  any  way  complete  which 


45 

does  not  give  some  attention  to  the  bearing  of  cost  accounting 
on  the  future  relations  between  capital  and  labor. 

Students  of  industrial  progress  are  agreed  that  we  are  prob- 
ably on  the  threshold  of  an  era  of  material  prosperity  such  as 
the  world  has  never  before  seen.  Within  our  reach  are  veins 
of  wealth  which  when  tapped  will  produce  a  flow  of  riches 
which  will  place  the  world  in  an  economic  position  compared 
with  which  our  present  state  must  be  regarded  as  one  of  com- 
parative poverty.  W'e  have  in  our  possession  the  means  of 
doubling  our  present  production  of  wealth,  and  of  raising  our 
standard  of  living;  before  us  lies  a  clearly  marked  road,  which, 
if  we  elect  to  follow  it  will  bring  us  to  a  modern  Utopia  where 
men  will  work  less  hours  and  reap  greater  profits,  and  the  human 
race  at  last  come  into  its  full  inheritance. 

Frederick  Taylor  in  "The  Principles  of  Scientific  ]\Ianage- 
ment"  makes  the  following  statement: 

The  general  adoption  of  scientific  management  would  readily  in  the 
future  double  the  productivity  of  the  average  man  engaged  in  industrial 
work.  Think  of  what  this  means  to  the  whole  countrj-.  Think  of  the 
increase,  both  in  the  necessities  and  luxuries  of  life,  which  becomes  avail- 
able for  the  whole  country,  of  the  possibility  of  shortening  the  hours 
of  labor  when  this  is  desirable,  and  of  the  increased  opportunities  for 
education,   culture  and   recreation   which  this   implies. 

And  there  w^as  probably  no  one  better  qualified  to  speak  with 
authority  in  this  matter  than  the  late  Mr.  Gantt,  to  whom  Charles 
W.  Wood  in  "The  Great  Change"  attributed  the  following: 

If  our  industrial  machine  were  made  to  run  at  top-speed  and  maximum 
capacity,  according  to  the  laws  of  production  which  have  already  been 
discovered,  America  could  win  the  war,  pay  for  it  out  of  hand,  live  in 
comparative  opulence  while  we  are  doing  so  and  be  immensely  richer 
at  the  close  than  we  were  ever  before. 

On  the  whole  only  about  50  per  cent  of  our  industrial  machines  are 
actually  operating  during  the  time  they  are  expected  to  operate ;  and  on 
the  whole  these  machines,  during  the  time  they  are  being  operated,  are 
producing  only  about  50  per  cent  of  what  they  are  expected  to  produce. 
This  brings  our  productive  result  down  to  about  one-fourth  of  what  it 
might  be  if  the  machines  were  run  all  the  time  at  their  highest  capacity. 

This  conclusion  is  not  a  guess,  but  is  based  upon  reliable  data.  Unfor- 
tunately there  are  many  other  elements  of  unnecessary  waste  in  our 
productive  processes  which  cannot  be  so  accurately  calculated  but  which 
reduce  our  effectiveness  certainly  to  20  and  very  probably  to  15  per  cent. 

In  "Man  to  Alan,"  John  Leitch  writes  as  follows: 

My  own  opinion  is  that,  considering  the  country  as  a  whole,  we  have 
not  during  the  past  ten  or  fifteen  years,   secured  more   than  40  per   cent 


46 

of    our    labor    efficienc}';    that   is   we    have    wasted    probably   60   per    cent 
of  our  manufacturing  capacity. 

This  is  a  stupendous  waste — far  greater  than  the  wastage  of  war  and 
it  acts  and  reacts  through  our  whole  national  organization.  It  prevents 
a  just  measurement  of  wages,  lengthens  hours  unduly,  and  makes  production 
costs  and  consequently  sales  prices  unreasonable.  The  average  commodity 
going  through  no  particularly  minute  fabrication  doubles  in  price  from 
the  raw  material  to  the  consumers,  so  this  deplorable  state  of  affairs  hits 
everj'body. 

And  Frank  A.  Vanderlip,  President  of  the  National  City  Bank, 
states: 

There  is  good  reason  to  believe  that  if  in  every  department  of  production 
the  efiiciency  of  all  labor  were  raised  to  the  standard  of  the  best  present 
practice,  the  industrial  output  of  this  country  would  be  doubled.  Experi- 
enced industrial  managers  of  wide  observation  go  so  far  as  to  say  it 
could  be  quadrupled,  but  if  it  should  be  increased  25  per  cent,  or  even 
ID  per  cent,  by  simply  doing  our  work  by  better  methods,  all  the  cost  of 
the  war  would  soon  be  made  up. 

In  the  light  of  the  above  statements  it  does  not  seem  far 
fetched  to  compare  the  old  attitude  of  capital  and  labor  toward 
each  other  to  that  of  two  dogs  fighting  over  a  bone  and  leaving 
untouched  a  large  juicy  steak  lying  just  under  their  noses. 

Entirely  aside  from  the  ethics  of  the  matter,  however,  it  is 
obvious  that  unless  a  fair  distribution  of  the  benefits  derived 
therefrom  is  guaranteed  to  labor,  capital  can  never  obtain  its 
cooperation  in  the  adoption  of  the  necessary  steps  towards  in- 
creasing efficiency.  These  are  days  when  momentous  changes 
are  in  the  air,  as  the  late  George  W.  Perkins  wrote : 

.  .  .  we  are  entering  a  new  period  of  relationship  between  capital  and 
labor.  In  the  long  ago  this  relationship  was  that  of  owner  and  slave; 
then  came  the  period  of  master  and  man ;  then  the  period  of  emplo3'er 
and  employee,  each  period  being  a  decided  step  forward.  I  believe  that 
we  are  just  now  entering  a  period  of  co-partnership,  when  the  tool  user 
will  be  part  tool  owner  and  when  capital  and  labor  will  share  more 
equitably  in  the  profits  of  the  business  in  which  they  are  jointly  engaged. 

Mr.  Perkins,  as  is  well  known,  was  a  strong  advocate  of  profit 
sharing  in  its  true  sense,  which  he  defined  as  follows : 

By  profit  sharing  I  do  not  mean  bonus  giving.  I  mean  actual  profit 
sharing  based  on  the  earnings  of  the  business,  with  a  fair  percentage  to 
capital  and  a  fair  percentage  to  labor  after  ordinary  wages  and  interest 
have  been  earned.  Profit  sharing  can  be  practiced  satisfactorily  only 
when  the  business  concern  makes  its  transactions  public,  so  that  the  laborer 


47 

and  the  stockholder  can  know  as  much  about  the  business  as  the  manager 
himself.  In  the  adjustment  of  difficulties  between  capital  and  labor  I 
am  confident  that  open  books  will  accomplish  much  more  than  open  shops. 

But  much  as  he  respects  Mr.  Perkins'  judgment  in  other 
matters  the  author  must  confess  that  in  his  opinion  Mr.  Perkins 
overrates  the  capacity  of  the  average  working  man  to  perceive 
the  relationship  between  causes  and  their  uUimate  effects.  The 
ordinary  human  being  is  so  constituted  that  to  call  forth  his 
best  efforts  demands  that  there  should  be  some  clearly  shown 
direct  relationship  between  these  efforts  and  their  reward,  and 
it  calls  for  no  little  powers  of  imagination  for  a  worker  at  the 
bench  to  see  any  direct  relationship  between  his  personal  effi- 
ciency to-day  and  the  annual  profits  of  the  huge  corporation 
which   employs  him. 

For  the  laborer  to  "know  as  much  about  the  business  as  the 
manager  himself,"  to  use  Mr.  Perkins  own  words,  calls  for 
a  higher  calibre  of  mentality  in  laborers  than  they  usually 
possess.  Uncjuestionably,  a  policy  of  profit  sharing  creates  a 
community  of  interest  between  employer  and  employee  which 
is  of  tremendous  value  in  the  establishment  and  maintenance 
of  harmonious  relationship,  but  if  the  object  in  view  is  the 
raising  of  the  efficiency  of  an  organization  to  a  lOO  per  cent 
basis  in  the  author's  opinion  at  least,  this  cannot  be  accomplished 
by  any  general  distribution  of  profits. 

In  one  respect,  however,  profit  sharing  presents  an  advantage 
over  a  plan  under  which  there  is  a  more  direct  relationship 
between  the  personal  efforts  and  reward  of  the  employees.  The 
introduction  of  a  system  of  profit  sharing  is  a  comparatively 
simple  matter — the  directors  decide,  for  instance,  that  all  profits 
over  5  per  cent  on  the  capital  stock  shall  be  divided  between 
the  stockholders  and  the  employees  on  a  70-30  basis  or  in  any 
other  proportions  that  may  be  decided  upon — a  notice  is  then 
sent  to  the  employees  advising  of  the  action  taken  by  the  directors 
and  the  matter  then  resolves  itself  into  a  simple  matter  of  book- 
keeping. On  the  other  hand,  the  introduction  of  a  system 
whereby  the  employees  are  to  be  rewarded  in  accordance  with 
their  efficiency  calls  for  the  determination  of  standards  for  all 
activities  and  the  installation  of  methods  of  accounting  which 
will  furnish  reliable  information  relative  to  variations  from  these 
standards  and  which  will  distinguish  between  cost  variations  over 
which  the  employees  can  properly  exercise  control  and  those 
which  are  dependent  upon  causes  outside  of  their  sphere  of 
influence. 


48 

In  the  author's  opinion,  John  Leitch  more  nearly  approaches 
the  solution  of  the  problem  in  his  "Industrial  Democracy"  plan, 
in  any  event  there  is  a  more  direct  relation  between  the  worker's 
effort  and  his  reward  under  this  plan  than  there  is  under  the 
general  profit  sharing  plans  which  Mr.  Leitch  criticizes  as  follows : 

After  a  long  investigation  of  many  systems  I  have  concluded  that  it 
is  unfair  to  permit  the  compensation  of  the  worker  to  depend  upon  any 
factor  which  he  does  not  control ;  he  may  do  his  work  well  and  find  that 
there  are  no  profits  because  the  company  did  not  sell  at  a  proper  price, 
or  granted  improper  credits,  or  did  any  one  of  the  thousand  things  which 
lose  money.  If  under  profit  sharing  he  does  his  work  and  gets  no  dividend 
he  is  very  properly  dissatisfied. 

Mr.  Leitch's  plan  for  giving  the  worker  a  direct  interest  in 
the  business  is  to  share  with  him  the  savings  resulting  from 
economies.     This  plan  in  his  own  words  is  as  follows: 

Here  is  how  it  works  in  practice.  I  take  the  cost  of  a  unit  of  production 
in  the  period  preceding  the  introduction  of  Industrial  Democracy  and 
compare  that  cost  with  the  results  after  democracy  has  gone  into  effect. 
If  there  is  a  saving,  then  one-half  that  aggregate  saving  is  the  amount 
of  the  economy  dividend  for  the  period  and  is  paid  to  the  men  as  an 
added  percentage  to  wages.  This  is  a  dividend  upon  service.  It  should 
be  paid  at  intervals  not  longer  than  two  weeks,  to  preserve  it  as  a  matter 
of  current  every-day  interest. 

There  is  sound  psychology  underlying  Mr.  Leitch's  plan — 
consider  for  a  moment  the  stimulus  of  a  two-weekly  distribution 
based  upon  the  actual  results  realized  by  the  workers  compared 
with  that  resulting  from  an  annual  dividend  based  largely  upon 
a  showing  over  which  the  worker  may  have  little  control.  In 
a  factory  where  Mr.  Leitch's  plan  was  operating,  there  would 
be  little  need  of  close  supervision  by  the  management  of  the 
individual  worker,  for  this  would  be  undertaken  by  the  workers 
themselves.  The  author  once  visited  a  small  factory  where  the 
proprietor  saved  the  expense  of  checking  the  employee's  piece 
work  earnings  by  letting  the  workers  calculate  these  themselves 
and  post  them  on  a  board  in  a  conspicuous  place  in  the  shop, 
relying  on  the  fact  that  any  worker  who  overstated  his  earnings 
would  be  called  to  account  by  his  fellow  workers. 

If  this  plan  worked  successfully,  and  the  manufacturer  who 
used  it  claimed  that  it  did,  how  much  stronger  would  be  the 
moral  effect  of  a  plan  like  Mr.  Leitch's  where  an  employee  to 
get  more  than  was  due  him  would  be  robbing  his  fellow  em- 


49 

ployees!     As  to  this  feature  of  his  plan,  Mr.   Leitch  has  the 
following  to  say: 

The  man  who  came  into  that  shop  and  acted  as  if  he  were  working 
for  and  not  with  the  boss  soon  got  his  awakening.  The  men  held  a 
slacker  as  no  better  than  a  thief  for  he  was  stealing  from  them  by  helping 
to  cut  down  dividends. 

Now  it  will  be  obvious  to  students  of  accounting  that  the 
ordinary  systems  of  cost  accounting  are  totally  unsuitable  to 
meet  the  accounting  demands  which  would  be  made  by  Mr. 
Leitch's  or  any  similar  plan.  The  great  majority  of  cost  systems 
are  designed  with  one  purpose  only  in  view,  namely,  the  ascer- 
taining of  the  cost  of  the  articles  manufactured,  and  are  so 
absolutely  inelastic  that  it  is  a  hopeless  matter  in  most  cases 
to  apply  them  successfully  for  any  other  purpose  than  the  narrow 
one  for  which  they  were  created. 

There  is  something  almost  sublime  in  the  lofty  manner  in 
which  engineering  and  other  non-accounting  writers  dispose  of 
the  complex  accounting  problems  which  touch  upon  their  own 
undertakings.  Mr.  Leitch  is  no  exception  to  this  rule — he 
devotes  a  single  brief  paragraph  to  explaining  how  the  trifling 
detail  of  the  accounts  is  handled  and  then  hurries  on  to  matters 
of  greater  moment.  What  he  has  to  say  on  the  subject  of 
accounts  is  as  follows: 

Now  for  the  first  question — the  calculation  of  the  dividends  when  costs 
are  rising.  Economy  is  a  relative  term.  I  calculate  the  relative  saving 
in  cost  of  production.  Suppose  wages,  materials,  etc.,  have  risen  50  per 
cent  over  a  former  period  but  production  costs  have  gone  up  only  30 
per  cent — then  have  not  the  production  costs  relatively  decreased?  I  take 
it  that  they  have  and  award  dividends  upon  this  basis. 

Simple,  is  it  not?  First  we  "take  the  cost  of  a  unit  of  produc- 
tion in  the  period  preceding  the  introduction  of  Industrial 
Democracy"  and  then  we  "calculate  the  relative  saving  in  cost 
of  production"  and  that  is  all  there  is  to  it!  Obviously,  the 
whole  question  of  justice  to  the  management  and  the  worker 
depends  upon  the  accuracy  of  the  method  of  figuring  the  saving, 
and  if  Mr.  Leitch  wished  to  be  really  helpful  to  those  who  desired 
to  put  his  plan  into  effect  it  would  seem  as  if  a  little  more 
practical  information  on  this  subject  would  have  been  distinctly 
to  the  point. 

A  test  of  the  soundness  of  any  general  theory  is  whether 
it  is  capable  of  universal  application  and  in  the  final  analysis 


so 

Mr.  Leitch's  method  of  figuring  "economy  dividends"  will  be 
tried  in  this  crucible.  Taking  the  case  of  one  simple  product, 
for  instance  that  of  cement,  no  particular  difficulty  should  be 
experienced  in  figuring  the  "cost  of  a  unit  of  production"  and 
the  "relative  saving  in  cost  of  production"  along  the  lines  Mr. 
Leitch  suggests,  but  how  does  he  propose  to  figure  those  things 
in  the  class  of  undertaking  with  which  the  author  is  most 
familiar,  where  a  single  factory  will  manufacture  thousands  of 
different  articles  involving  tens  of  thousands  of  different  opera- 
tions and  at  the  end  of  a  two-weeks'  period  the  factory  floors 
will  be  loaded  with  work  in  process  in  various  stages  of  manu- 
facture? Is  it  then  a  simple  matter  to  figure  the  cost  of  all  the 
different  units  of  production  and  the  "relative  saving  in  cost  of 
production"  every  two  weeks? 

Another  question,  and  that  is  whether  Mr.  Leitch's  methods 
are  intrinsically  just.  Assume,  for  instance,  that  there  are  two 
factories  which  previous  to  the  introduction  of  "Industrial 
Democracy"  are  respectively  25  and  50  per  cent  efficient  and 
that  after  "Industrial  Democracy"  is  in  full  blast  they  both 
reach  an  efficiency  of  80  per  cent.  That  is  to  say,  productive 
operations  which  on  a  basis  of  100  per  cent  efficiency  should 
cost  $100  before  the  introduction  of  "Industrial  Democracy" 
cost  $400  and  $200  respectively,  and  that  afterwards  the  cost 
in  both  factories  is  reduced  to  $125.  In  the  first  case,  for  every 
hundred  dollars'  worth  of  production,  figured  on  a  100  per  cent 
efficiency  basis,  the  workers  will  receive  one-half  of  the  saving 
of  $275  or  $137.50,  while  in  the  second  case  they  will  only 
receive  one-half  of  the  saving  of  $75  or  $37.50.  The  example 
may  be  an  extreme  one,  but  the  principle  applies,  and  considered 
from  this  viewpoint  ]\Ir.  Leitch's  plan,  though  providing  a  reward 
for  ultimate  competency,  also  furnishes  a  premium  in  proportion 
to  the  original  incompetency.  Imagine  ]Mr.  Leitch's  plan  in 
more  or  less  universal  operation  and  it  is  reasonable  to  suspect 
that  there  would  be  difficulty  in  getting  workers  for  a  factory 
which  was  operated  with  a  fair  degree  of  efficiency  previous  to 
the  introduction  of  "Industrial  Democracy,"  for  obviously  it 
would  be  far  more  profitable  to  work  for  the  concerns  which 
were  most  hopelessly  inefficient  previous  to  the  adoption  of  Mr. 
Leitch's  methods. 

In  using  past  results  as  his  basis  of  comparison,  Mr.  Leitch's 
methods  cannot  but  be  considered  as  a  step  backwards.  The 
whole  conception  of  modern  industrial  thought  as  represented  by 
scientific  management  is  based  on  the  setting  of  standards  of 


SI 

possible  attainment  and  Mr.  Leitch's  plan  of  making  his  com- 
parisons with  past  results  is  in  line  with  the  fundamental  defect 
in  cost  accounting  methods  generally  which  are  confined  to 
recording  and  comparing  past  accomplishments  expressed  with- 
out relation  to  standards. 

A  really  equitable  plan  for  the  sharing  of  savings  resulting 
from  increased  efficiency  demands  first  the  determination  of 
standards  for  all  operations — standards  of  time,  of  material  con- 
sumption, and  of  quality  of  product,  and  second  a  really  scien- 
tific system  of  cost  accounting  which  in  addition  to  showing  the 
actual  efficiency  realized  will  enable  a  clear  distinction  to  be 
made  between  the  effect  of  factors  over  which  the  workers  have 
control  and  those  which  are  beyond  their  power  to  influence. 
Furthermore,  the  cost  system  should  have  constructive  value  in 
pointing  out  the  causes  contributing  to  a  failure  to  realize  the 
standard  set.  In  addition,  the  plan  should  be  such  as  to  enable 
comprehensive  statements  to  be  furnished  the  workers  in  such 
form  as  to  be  intelligible  to  them.  As  Mr.  Perkins  states,  "open 
books  will  accomplish  much  more  than  open  shops"  and  it  is 
easy  to  believe  that  we  are  approaching  a  time  when  manufac- 
turers will  realize  that  it  is  a  good  policy  to  take  their  workers 
to  a  greater  extent  than  before  into  the  councils  of  management. 
It  is  hardly  consistent  to  keep  workers  entirely  in  the  dark  as 
to  the  fundamental  facts  of  business  and  then  to  complain  that 
through  ignorance  of  these  facts  they  sometimes  make  absurd 
and  unjust  claims.  The  ignorance  of  the  average  worker  of 
fundamental  economic  facts,  if  somewhat  appalling,  is  not  sur- 
prising when  one  considers  how  little  opportunity  he  has  to 
become  acquainted  with  these  facts,  and  how  distorted  is  the 
information  which  is  often  handed  him  by  his  leaders. 

The  essential  features  which  a  cost  system  should  possess  in 
order  to  furnish  the  means  for  ecjuitably  figuring  savings  in 
costs  for  distribution  to  workers,  which  were  enumerated  above, 
are  also  those  which  a  manufacturer  should  demand  of  a  cost 
system  to  meet  his  own  requirements  in  connection  with  the 
management  of  his  business.  These  requirements  ^re  met  by 
the  scientific  methods  of  standard  or  predetermined  cost  account- 
ing described  in  this  volume. 


52 


The    Influence    of    Scientific    Methods    on    Industrial 

Progress 

Our  present  civilization  differs  from  all  previous  civilizations 
in  one  fundamental  respect.  Ancient  civilizations  rose  to 
a  certain  point  and  then  having  failed  to  find  the  key  to  con- 
tinued progress  advanced  no  further  and  ultimately  crumbled 
to  ruin.  Excavations  made  on  the  site  of  ancient  Nineveh 
revealed  great  libraries  of  books  consisting  of  bricks  and 
cylinders  of  various  sizes  with  inscriptions  transcribed  on  them 
while  in  the  state  of  clay  and  rendered  indelible  by  subsequent 
baking,  some  of  the  tablets  discovered  dating  as  far  back  as 
4500  B.C.,  while  Assyriologists  in  general  are  inclined  to  believe 
that  a  high  state  of  civilization  had  been  attained  in  Mesopotamia 
at  least  9000  years  ago.  The  significance  of  these  discoveries 
was  well  described  by  the  historian  William  Gates  when  he 
wrote : 

We  may  note  at  once  how  these  new  figures  disturb  the  historical 
balance.  If  our  forerunners  of  eight  or  nine  thousand  years  ago  were 
in  a  noonday  glare  of  civilization,  where  shall  we  look  for  the  much  talked 
of  "dawnings  of  history"  ?  By  this  new  standard  the  Romans  seem  our 
contemporaries  in  latter  day  civilization;  the  "Golden  Age"  of  Greece  is 
but  yesterday;  the  pyramid-builders  are  only  relatively  remote.  The  men 
who  built  the  temple  of  Bel  at  Nippur  in  the  year  (say)  5000  B.C.,  must 
have  felt  themselves  at  a  pinnacle  of  civilization  and  culture. 

The  "open  sesame"  to  the  door  of  progress,  which  the  ancients 
lacked,  and  the  factor  which  rendered  possible  the  remarkable 
advance  in  knowledge  of  recent  centuries  was  the  development 
of  the  scientific  method — that  process  of  trial  and  error  under 
which  each  tentative  theory  advanced  is  submitted  to  the  check 
of  experiment  and  accepted  or  rejected  on  this  basis. 

The  Greek  philosophers  failed  to  develop  scientific  method, 
owing  to  their  tendency  to  formulate  broad,  general  theories 
without  submitting  these  to  the  acid  test  of  experiment,  so  that 
they  would,  build  up  an  elaborate  structure  on  a  foundation  of 
false  premise,  a  classical  instance  of  this  being  Aristotle's  doc- 
trine that  of  two  weights  dropped  from  a  height  the  heavier 
would  fall  the  faster.  Observing  probably  that  pebbles  dropped 
to  the  ground  quicker  than  feathers  the  philosopher  rashly  as- 
sumed that  the  heavier  the  thing  was  the  quicker  it  would  fall, 
and  overlooking  the  factor  of  air  resistance  concluded  that 
"bodies   fall   with  velocities  proportional  to   their   weights,"   a 


S3 

doctrine  that  was  universally  accepted  for  over  nineteen  hundred 
years  and  which  formed  the  basis  of  many  a  learned  discussion. 
It  remained  fur  Galileo  in  1590  to  apply  scientific  methods  in 
the  testing  of  the  correctness  of  Aristotle's  doctrine  which  as 
is  well  known  he  did  by  dropping  weights  from  the  leaning  tower 
of  Pisa  and  establishing  the  fact  that  bodies  do  not  fall  with 
velocities  proportional  to  their  weights  and  that  except  for  the 
resistance  of  the  air  all  bodies  would  fall  through  the  same 
space  in  uniform  time. 

It  was  due  to  the  diffusion  of  the  scientific  spirit  and  scientific 
methods  that  in  the  space  of  two  brief  centuries  man  made  a 
greater  advance  in  his  control  over  natural  forces  than  in  the 
thousands  of  years  previous.  What  a  staggering  advance  was 
made  between  the  years  1700  and  1900!  In  1700  the  first 
practical  steam  engine  had  not  been  constructed  and  over  a 
hundred  years  were  to  elapse  before  George  Stephenson's 
"Puffing  Billy"  ushered  in  the  era  of  steam  locomotion,  and 
Robert  Fulton's  Clcniiont  demonstrated  that  steam  navigation 
was  a  practical  commercial  possibility.  Probably  if  one  of  the 
inhabitants  of  Nineveh  in  the  good  old  days  seven  thousand 
years  B.C.  could  have  returned  to  this  earth  about  a.d.  1700 
he  would  have  found  less  to  astonish  him  than  would  the  Pil- 
grim fathers  if  they  could  to-day  revisit  the  country  in  which 
they  found  refuge  from  religious  persecution. 

It  is  hardly  necessary  to  enlarge  upon  the  tremendous  develop- 
ment of  industry  in  the  last  few  decades  due  to  the  introduction 
of  scientific  methods  in  business,  but  owing  to  our  unfortunate 
habit  of  making  comparisons  of  current  achievements  mainly 
with  past  results  and  without  reference  to  what  we  could  attain 
if  we  realized  our  full  possibilities,  we  fail  to  perceive  that 
remarkable  as  our  achievements  may  have  been  through  the 
adoption  of  scientific  methods  they  fall  lamentably  short  of 
what  lies  within  our  powers.  As  William  C.  Redfield  says  in 
"The  New  Industrial  Day": 

So  splendid  have  been  the  results  of  our  industrial  growth,  so  brilliant 
the  victories  of  our  manufacturers  at  home  and  abroad,  so  astonishing 
the  inventive  skill  with  which  by  special  tools  and  new  appliances  we 
have  reduced  the  cost  of  our  production,  so  matchless  has  been  the  courage 
with  which  some  of  us  have  forsaken  the  old  and  taken  up  the  new, 
that  we  are  apt  to  lose  sight  of  the  fact  that  these  achievements  and  this 
brilliancy  and  fine  courage  have  been  the  characteristics  of  the  few  rather 
than  of  the  many,  and  that  most  of  our  industries  are  still  laggards  in 
the    race. 


54 

The  desire  to  excel  is  inherent  in  human  nature — we  do  not 
Hke  to  feel  that  we  are  less  efficient  than  our  neighbors  and 
even  the  slackest  of  farmers  will  generally  keep  the  weeds  out 
of  the  fields  that  adjoin  the  travelled  road.  Business  men  as 
a  whole  are  ambitious  to  achieve  the  best  results  and  no  manu- 
facturer worthy  of  the  name  would  be  satisfied  to  have  his 
business  continue  in  a  state  of  marked  inefficiency  if  he  could 
be  convinced  that  this  condition  really  existed.  The  problem, 
therefore,  resolves  itself  largely  into  one  of  education  in  provid- 
ing means  for  furnishing  every  manufacturer  with  correct  in- 
formation as  to  how  closely  he  realizes  the  inherent  possibilities 
of  his  business,  and  further  as  to  where  and  why  he  has  failed. 
Provide  a  manufacturer  with  periodical  statements  showing  how 
many  thousands  of  dollars  he  is  throwing  away  each  month 
because  through  lack  of  proper  methods  of  planning  his  work 
his  machines  are  operating  at  a  fraction  of  their  potential 
capacity  and  it  will  not  be  long  before  he  has  taken  the  necessary 
steps  to  properly  operate  his  plant.  Furnish  a  sales  manager 
with  statements  showing  that  through  lack  of  orders  resulting 
in  the  factory  being  operated  at  less  than  full  capacity  $20,000 
a  month  is  being  added  to  the  cost  of  the  goods  which  are  being 
produced,  and  the  chances  are  that  with  this  information  before 
him  he  will  figure  out  some  way  to  obtain  enough  business  at 
a  reduced  price  to  eliminate  that  $20,000  from  subsequent  state- 
ments. 

The  first  step  towards  correcting  an  error  is  determining  its 
existence.  As  Sir  Francis  Bacon  wrote:  "Truth  to  emerge 
sooner  from  error  than  from  confusion"  and  the  first  step  on 
the  road  towards  efficiency  is  to  know  definitely  not  how  our 
methods  of  to-day  compare  with  yesterday,  but  how  they  stack 
up  in  comparison  with  what  industrial  science  has  proved  to  be 
possible;  to  quote  once  more  from  ]\Ir.  Gantt,  who  saw  so  clearly 
and  spoke  so  fearlessly: 

We  claim  to  be  an  industrial  nation.  I  feel  we  are  only  just  beginning 
to  be  an  industrial  nation,  and  shall  not  be  fully  entitled  to  that  name 
until  we  have  a  complete  knowledge  of  the  principles  on  which  successful 
industry   is    based. 

Too  man}'  of  our  enterprises  are  still  founded  on  what  has  been  done 
rather  than  on  what  can  be  done.  The  real  industrial  leader  must  he 
guided  by  future  possibilities  rather  than  past  performances. 

The  author  has  italicized  the  last  sentence  for  in  these  few 
words  he  feels  that  Mr.  Gantt  strikes  the  kev-note  of  this  volume. 


C06T  or  SALIS 

Qie  aaat  prlaelpla  la  employed  In  figurine  eoet  of  i^l^t 
•«  is  folloved  In  the  case  of  &*oert«lnin«  current  oost*  the  ararege  ratio*  of 
aotwl  to  statxiBrd  ^terlal,  labor  and  burden  being  applied  to  the  standard 
costs  of  the  goods  shipped.  In  the  c&se  shorn  the  increase  of  acttal  otsY  the 
standard  cost  of  the  goods  shipped  due  to  the  causes  analyzed  In  detail  »*  the 
Suooarized  Kaaufacturing  Kfflcieocy  Stiiteitent,  was  as  follows: 


Increased  actual  cost  oo^ared 

vith  standard 
Reducing  the  Btendard  profit  of 

To  an  actual  profit  of 


Total 


$1,936.55 
3,842.00 


$1,905.45 


Per  10.000  bolts 


$  9.68 
19.21 


COSTOFSALE5 


STATEMENT  OF  COST  OF  SALES 
No. of  Pieces  Shipped  2,000,000 


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Fig,  3.— Diagram  illustrating  principles  underlying  system  of  standard  or  pfedetennined  ( 


55 


The  Principles  of  a   Cost   System   Based  on   Standards 

The  underlying  principles  of  a  system  of  cost  accounting 
based  upon  the  use  of  standards  may  best  be  understood  by 
considering  an  exceedingly  simple  illustration.  Accordingly,  in 
Figure  3  is  shown  in  diagram  form  the  essential  features  of  a 
system  of  cost  accounting  to  meet  the  requirements  of  a 
hypothetical  case,  in  which  it  is  assumed  that  a  manufacturing 
concern  has  accepted  a  contract  for  the  manufacture  of  several 
million  machine  bolts  at  a  price  of  $13  a  thousand.  It  is  further 
assumed  for  the  sake  of  simplicity  that  the  business  in  c^uestion 
is  confined  to  the  performance  of  this  contract. 

Before  making  a  bid  for  this  work  the  cost  department  has 
been  instructed  to  make  a  careful  estimate  of  the  cost  of  making 
this  bolt  and  in  the  standard  cost  card  shown  in  Form  I  it  will 
be  seen  that  the  estimated  or  standard  cost  of  the  bolts  is 
$11,079  V^^  thousand  and,  therefore,  the  estimated  or  standard 
profit  on  the  contract  is  $1,921  a  thousand. 

This  diagram  illustrates  the  following  important  information 
obtained  by  the  use  of  standard  costs: 

1  Manufacturing  efficiencies 

2  Current  costs 

3  Cost  of  sales 

I  Manufacturing  Efficiencies 

The  executive  of  a  concern  engaged  in  the  carrying  out  of 
a  contract  such  as  has  been  described  is  primarily  interested  in 
knowing  the  extent  to  which  the  actual  costs  vary  from  the 
standard  and  the  causes  underlying  these  variations.  All  of 
his  plans  are  based  upon  the  assumption  that  he  is  going  to 
realize  his  standard  profit  of  $1,921  per  thousand  and,  the 
selling  prices  of  the  bolts  being  fixed,  his  activities  will  be  solely 
directed  to  keeping  the  manufacturing  cost  to  the  standard  or 
below  it.  The  variations  from  standard  are  brought  to  a  focus 
on  the  summarized  manufacturing  efficiency  statement  (Form 
A)  which  shows  the  actual  and  standard  expense  of  material, 
labor  and  burden,  and  the  increases  or  decreases  comparing 
actual  cost  with  standard,  the  former  being  shown  in  red  and 
<he  latter  in  black. 

Considering  this  statement  in  detail,  obviously  the  first  thing 
that  will  strike  the  eye  of  the  executive  is  the  red  ink  figure 


56 

showing  that  the  actual  cost  of  the  month's  operations  is 
$2816.30  in  excess  of  standard  this  increase  analyzed  under  the 
heads  of  material,  labor  and  burden  being  as  follows: 

Material    $1395.00 

Labor    210.30 

Burden   1211.00 

Total $2816.30 

This  increased  cost,  which  represents  8.7  per  cent  of  standard, 
is  obviously  a  serious  matter  for  the  standard  profit  on  which 
the  executive  has  calculated  represents  only  a  little  over  17 
per  cent  of  standard  cost,  so  that  it  may  be  assumed  that  he 
will  immediately  institute  a  searching  enquiry  as  to  the  reasons 
why  his  plans  have  so  sadly  fallen  down,  so  that  prompt  steps 
can  be  taken  to  eliminate  all  preventable  inefficiencies  and  reduce 
costs  as  nearly  as  possible  to  the  standard  adopted. 

Following  the  same  process  as  the  executive  would,  we  will 
consider  each  item  of  cost  appearing  on  the  summarized  manu- 
facturing efficiency  statement  individually  and  in  the  order  in 
which  they  appear  on  the  statement. 

Material.  The  increased  cost  of  material  totalling  to  $1395, 
details  of  which  are  shown  on  the  summarized  material  report 
(Form  C),  is  divisible  as  follows: 

Due  to  price  fluctuations $1,125.00 

Due  to  fluctuations  in  use  efficiency 270.00 

Total  increase $1,395.00 

The  increased  cost  due  to  price  fluctuations  is  made  up  as 
shown  in  Table  i : 

Table  I.     Fluctuation  in  Cost  of  Material 


Pounds 

Price 

Amount 

Actual  cost  of  material  used  in 
month 

Standard  cost  of  material  used  in 
month 

Increase  of  actual  over  standard  .  .  . 

1,125,000 
1,125,000 

$1.90 

1.80 

$0.10 

$21,375.00 
20,250.00 
$1,125.00 

57 

The  increased  cost  of  o.6io-inch  round  steel  of  $o.io  per 
hundred  pounds  is  apparently  due  to  a  serious  error  in  figuring 
the  standard  cost  of  this  material  at  $i.8o,  for  the  material 
account  (Form  B)  indicates  that  the  actual  cost  of  the  material 
received  during  the  month,  per  hundred  pounds,  was  as  follows: 

Purchase  price    $1-75 

Freight  inward    0.13 

Handhng   expense    0.02 

$1.90 

The  material  presumably  having  been  bought  on  contract,  the 
freight  being  a  fixed  charge,  the  only  possibility  of  reducing 
this  loss  resulting  from  price  variations  would  be  as  regards 
the  small  expense  of  handling.  Here  obviously  it  would  be 
desirable  to  adjust  the  standard  cost  and  the  plans  based  thereon. 

The  increased  cost  of  material  due  to  the  quantities  used 
being  in  excess  of  standard  will  then  call  for  attention.  This 
increase  is  made  up  as  shown  by  Table  2 : 

Table  2.     Fluctuation  in  Use  of  Material 


Actual  material  consumption  figured 
at  standard  price 

Standard  material  consumption  fig- 
ured at  standard  price 

Increased  material  consumption  fig- 
ured at  standard  price 


Pounds 


1,125,000 

1,110,000 

15,000 


Price 


$1.80 

1.80 

$1.80 


Amount 


$20,250.00 

19,980.00 

$270.00 


The  standard  consumption  shown  above  is  obtained  by  extend- 
ing the  standard  quantity  of  material  as  shown  on  the  standard 
cost  card  (Form  I)  by  the  number  of  bolts  cut  off  as  shown 
on  the  summarized  material  report  as  follows: 

Standard  quantity  of  material  per  10,000  bolts 3700  pounds 

Standard   quantity   of   material   per   production    of 

3,000,000  pieces  3700X300 1,110,000  pounds 


The  details  of  the  material  used  would  be  obtained  from  the 
detailed  material  requistions  which  would  show  for  each  batch 


58 

of  parts  cut  the  material  actually  used  and  the  standard.  From 
these,  daily  reports  would  be  made  for  the  executive  showing 
the  extent  of  the  variations  between  actual  and  standard.  These 
requisitions  would  be  analyzed  by  machines  so  that  inefficiencies 
could  be  traced  to  individual  operators.  By  this  means  the 
manufacturing  executive  could  maintain  the  closest  supervision 
over  the  use  of  material. 

Labor.  The  total  increased  labor  cost  of  $210.30  comparing 
actual  wath  standard,  as  shown  by  the  summarized  manufac- 
turing statement,  is  made  up  as  shown  by  Table  3: 


Table  3.     Fluctuation  in  Labor  Costs 


Increases  or  Decreases 

Increases  or  Decreases 

Due  to  Fluctuations 

Due  to  Fluctuations 

Operation 

Actual 

Standard 

in  Rates 

in  Efficiency 

Expense 

Expense 

Increase 

Decrease 

Increase 

Decrease 

Cutoflf 

$299 ■ 00 

$300 . 00 

$11.50 

$12.50 

Head 

2349.00 

2,349.00 

$81.00 

$81.00 

Point 

378.00 

291 .20 

14.00 

72.80 

Thread 

904.50 

780 . 00 

67.00 

57  50 

Totals. .  .  . 

$3,930.50 

$3,720.20 

$92 ■ 50 

$81.00 

$211.30 

$12.50 

Net  Increase 

or  Decrease 

$11.50 

$198.80 

In  the  summarized  production  and  payroll  report  (Form  D) 
is  illustrated  the  manner  in  which  the  variations  in  labor  costs 
are  determined.  The  standard  productive  hours  and  payroll 
figures  are  obtained  by  extending  the  standard  hours  and  amounts 
as  shown  on  the  standard  cost  card  (Form  I)  by  the  production 
as  appearing  in  the  column  so  headed  on  the  summarized  produc- 
tion and  payroll  report  (Form  D).  The  increases  and  decreases 
in  the  cutting  department  are  arrived  at  as  shown  by  Table  4: 

The  variations  in  labor  cost  for  the  other  departments  are 
obtained  in  the  same  manner  as  illustrated  above  for  the  cutting 
department. 

The  importance  of  distinguishing  between  labor  cost  varia- 
tions  resulting   from  changes  in  the   rates  paid   per  hour  and 


59 

those  due  to  variations  in  the  productive  efficiency  of  the 
operator  is  demonstrated  in  the  cuniparison  shown  above  for 
the  heading  department,  where  the  actual  cost  totals  the  same 
as  the  standard  and  which  ordinarily  would  be  passed  by, 
whereas  the  saving  of  $8i  resulting  from  decreases  in  the  rate 
per  hour  is  offset  by  the  decreased  efficiency  of  the  operators. 
In  the  illustration  given  it  is  assumed  that  the  burden  rate  per 
hour  of  the  cutting  department  is  $0.30  while  that  of  the  operator 
is  only  $0.25,  so  though  the  employment  of  operators  inferior 
to  standard  has  not  resulted  in  any  direct  labor  loss  the  50  hours 
taken  over  standard  represent  a  burden  loss  of  $15. 

Table  4.    Fluctuation  in  Cutting  Labor  Costs 


Hours 

Rate  per 
Hour 

Amount 

Standard 

Per  10,000  pieces  per  standard  cost  card  (Form  I) . 

Per  production  of  3,000,000  pieces  (Form  C) . .  .  . 
Actual 

Per  Form  D 

4 
1200 

1 150 

1150 

50 

$0.25 
0.25 

0.26 

O.OI 

0.25 

$1.00 
300 . 00 

299.00 

Increase 

Due  to  increase  in  rate  paid  per  hour 

II  .50 

Decrease 

Due  to  increased  efficiency,  as  compared  with 
standard 

12.50 

Net  decrease 

$1.00 

Burden.  The  principles  underlying  the  distribution  of  ma- 
terial and  productive  labor  are  simple  and  straightforward,  as 
such  expenditures  can  be  directly  applied  to  the  operation  or 
item  of  product  manufactured,  accordingly  in  the  distribution 
thereof  there  is  little  difference  among  accountants  as  to  the 
general  rules  to  be  followed.  In  the  case  of  general  expense 
or  burden,  however,  it  is  not  possible  in  the  majority  of  cases 
to  trace  any  direct  relationship  between  the  expenditure  and  the 
individual  item  of  product,  and  the  problem  of  providing 
methods  whereby  each  article  manufactured  will  be  charged  with 
a  share  of  such  expenditures  in  proportion  to  the  benefits  which 
accrue  to  it  therefrom  is  an  exceedingly  complex  one. 


6o 

In  the  earlier  days  of  manufacturing  when  Httle  machinery- 
was  employed  and  that  of  a  simple  character,  the  question  of 
proper  methods  of  burden  distribution  was  of  relatively  minor 
importance  as  the  burden  expense  represented  but  a  small  per- 
centage of  the  labor  cost  involved  in  the  manufacture  of  an 
article.  In  these  days  however  of  machinery,  expensive  to  pur- 
chase and  costly  to  maintain,  and  where  one  operator  may  have 
charge  of  six  or  more  machines  at  a  time,  the  burden  cost  will 
often  many  times  exceed  the  operating  payroll.  Accordingly 
the  problem  of  burden  distribution  is  very  vital,  and  one  upon 
the  successful  solution  of  which  the  prosperity  or  failure  of  a 
business  may  depend. 

In  spite  of  the  importance  of  proper  methods  of  burden 
distribution  there  are  still  found  manufacturers  who  are  content 
to  figure  the  burden  factor  in  their  costs  on  some  such  crude 
basis  as  by  adding  to  the  labor  cost  of  the  article  the  same 
percentage  which  the  total  burden  bears  to  the  total  productive 
labor  of  the  plant,  regardless  of  the  fact  that  one  item  of  product 
may  involve  90  per  cent  hand  work,  while  with  another  the 
same  percentage  of  work  would  be  performed  on  expensive 
automatic  machines.  Such  methods  have  undoubtedly  been  the 
basic  cause  underlying  the  failure  of  many  a  manufacturer  and 
the  salvation  of  more  fortunate,  but  no  less  incompetent  con- 
cerns, has  probably  often  been  due  to  the  fact  that  their  com- 
petitors were  equally  ignorant  of  the  proper  way  in  which  to 
figure  the  actual  costs  of  production,  so  that  they  all  operated 
under  the  same  handicap. 

It  is  often  necessary  to  introduce  somewhat  elaborate  methods 
of  burden  distribution  if  even  approximately  correct  costs  are 
to  be  obtained.  As  an  instance  of  the  importance  of  such  refine- 
ments may  be  cited  a  case  where  the  methods  employed  were 
considerably  in  advance  of  those  followed  in  the  average  concern 
and  yet  where  the  result  obtained  was  very  far  from  being 
correct.  Here  the  burden  was  carefully  analyzed  by  depart- 
ments and  distributed  to  the  work  passing  through  the  depart- 
ment in  proportion  to  the  productive  labor  expended  on  the  item 
of  product.  With  a  view  to  testing  the  accuracy  of  this  method 
of  distribution,  a  study  was  made  of  the  work  performed  on 
some  automatic  machines  as  compared  with  that  undertaken  on 
a  simple  machine  in  the  same  department,  the  burden  being 
distributed  on  a  uniform  basis  namely  as  a  percentage  of  the 
labor  chargeable  to  the  job.  In  the  former  case  there  were 
several  expensive  machines  operated  by  one  workman  with  an 


6i 

assistant.  In  the  latter  there  was  a  simple  inexpensive  machine 
requiring  the  full  attention  of  a  single  operator.  The  following 
statement  shows  in  comparative  form  the  more  important  dis- 
tinctions between  the  conditions  attending  these  machines: 

Automatic   Machines  Simple   Machine 

One    operator    with    an    assistant  One     operator     for     one    machine 

can    take    care    of    as    many    as    six      with  a  daily  wage  of,  say,  $3.50. 
machines  at  a  time  and  figuring  the 
payroll   of   these   two   at   a  total   of 
say  $6  a  day  gives  a  productive  labor 
cost  per   machine    of   $1    a   day. 

Relatively  heavy  tool  expense.  Relatively  small  tool   expense. 

Relatively    expensive    maintenance  Relatively     low     maintenance     ex- 

of  machine.  pense. 

High  power  consumption.  Low  power  consumption. 

It  was  found  in  the  case  illustrated  above  that  the  actual 
operating  and  maintenance  expense  per  day  on  the  automatic 
machines  (other  than  productive  labor)  was  at  least  three  times 
as  great  as  on  the  simple  machine  so,  assuming  that  the  method 
of  distribution  employed  to  result  correctly  as  regards  work 
performed  on  the  automatic  machines,  as  regards  the  work  done 
on  the  simple  machine  the  burden  charged  would  be  10^  of 
wdiat  would  be  equitable.  This  conclusion  is  arrived  at  as 
follows : 

Assume  that  the  daily  cost  of  operating  and  maintaining  the 
automatic  machine  (other  than  productive  labor)  is  $3.  The 
daily  cost  of  operating  the  simple  machine  (which  as  stated 
above  is  one-third  of  the  automatic  machine)  is  therefore  $1. 
The  daily  productive  labor  cost  on  each  automatic  machine  is  $1, 
therefore  the  cost  of  $3  a  day  for  operating  and  maintaining 
the  machine  represents  300  per  cent  of  the  productive  labor 
cost.  On  this  basis  under  the  distribution  plan  employed,  the 
daily  burden  charge  to  work  performed  on  the  simple  machine 
would  be  300  per  cent  of  the  daily  productive  labor  cost  of  $3.50, 
or  $10.50.  But  as  stated  above  it  was  found  that  the  actual 
burden  chargeable  to  the  simple  machine  should  be  only  $1  a 
day.  Therefore,  assuming  that  the  method  of  burden  distribu- 
tion adopted  is  correct  for  the  automatic  machines,  work  on 
the  simple  machine  is  charged  with  loj/^  times  what  it  should 
bear. 

The  above  is,  of  course,  an  extreme  but  not  unusual  case  and 
illustrates  the  danger  which  lies  in  using  averages  in  figuring 


62 

burden  in  a  plant  where  the  work  performed  is  not  of  a  uniform 
character. 

In  the  hypothetical  case  shown  in  Figure  3  there  is  only  a 
single  item  of  product  being  manufactured  to  which  all  expendi- 
tures must  ultimately  be  charged  and,  considered  from  the  basis 
of  an  exposition  of  methods  of  burden  distribution  to  meet 
complex  conditions,  this  illustration  is  imperfect  by  reason  of 
excess  of  simplicity.  Accordingly  a  description  of  methods  of 
burden  distribution  suitable  for  a  plant  manufacturing  an  ex- 
tensive and  varied  line  of  product  will  be  deferred  to  a  later 
chapter  where  accounting  methods  to  meet  such  requirements 
will  be  fully  described. 

The  situation  reflected  in  Figure  3,  however,  lends  itself 
admirably  to  illustrating  an  important  feature  in  connection 
M^ith  burden  distribution,  which  in  the  main  is  not  dealt  with 
in  the  voluminous  literature  on  this  subject.  As  was  previously 
stated,  the  usual  cost  accounting  horizon  is  limited  to  costs  to 
the  exclusion  of  causes,  the  work  of  the  cost  accounting  depart- 
ment being  confined  to  a  distribution  of  actual  expenditures 
without  regard  to  their  relationship  to  standards.  Accordingly, 
no  distinction  can  be  made  as  between  expenditures  which  result 
in  full  value  being  received  and  those  which  in  large  measure 
are  wasted  owing  to  incompetence  and  inefficiency. 

In  reality,  the  usual  forms  of  cost  accounting  confine  the 
records  to  one  side  of  the  ledger,  very  complete  and  elaborate 
analyses  being  made  of  the  actual  expenditures  representing  the 
debit  side  of  the  account  while  the  credit  side,  showing  the  value 
of  the  services  resulting  from  such  expenditures,  is  entirely 
omitted.  This  one-sided  form  of  accounting  shows  a  similar 
lack  of  appreciation  of  relative  values  to  that  displayed  by  those 
plant  superintendents  who  pay  a  great  deal  of  attention  to  insur- 
ing that  by  no  possible  chance  can  an  employee  be  paid  for  a 
minute  more  than  the  time  he  spends  on  the  premises,  but  in 
the  main  overlook  the  question  as  to  whether  from  the  employer's 
standpoint  the  employee  is  profitably  engaged  during  the  period 
for  which  he  is  being  paid. 

It  is  a  somewhat  singular  fact  that  under  the  accepted  methods 
of  valuing  inventories  at  cost,  it  is  perfectly  proper  for  a  public 
accountant  to  certify  as  to  the  accuracy  of  the  inventory  item 
on  the  balance  sheets  of  two  concerns  next  door  to  one  another 
and  manufacturing  identical  products,  while  owing  to  wasteful 
and  inefficient  methods  the  cost  of  manufacture  of  one  is  20 
per  cent  more  than  the  other,  so  that  as  regards  the  inventory 


63 

item,  at  least,  if  may  be  stated  that  the  greater  the  inefficiency 
the  more  valuable  the  asset.  Of  course  no  auditor  would  accept 
a  cost  valuation  in  excess  of  selling  price  if  his  examination 
disclosed  this  fact,  as  it  doubtless  would,  but  within  limits  the 
statement  made  is  correct. 

The  far-reaching  consequences  resulting  from  what  'Mr. 
Polakov  calls  "this  fatal  misconception  of  what  constitutes  the 
cost  of  a  commodity"  are  ably  described  in  his  articles  on 
"Mastering  Power  Production,"  published  in  Industrial  Man- 
agement during  191 8.  It  is  begirming  to  be  realized  that  the 
wasteful  and  inefficient  manufacturer  is  not  solely  his  own  enemy, 
but  that  of  his  employees  and  of  the  community  at  large.  In 
the  long  run  the  ultimate  consumer  pays  for  all  inefficiencies  and 
the  manufacturer  who  wastes  material  and  human  labor  is  to 
this  extent  contributing  to  the  high  cost  of  living,  and  hastening 
the  day  of  the  exhaustion  of  natural  resources. 

The  obvious  solution  of  the  problem  is,  first,  the  determination 
of  the  necessary  or  standard  cost  of  manufacture  and,  second, 
the  separation  of  expenditures  between  those  which  are  necessary 
and  those  which  are  the  result  of  inefficiencies.  As  Mr.  Polakov 
states:  "an  accurate  knowledge  of  the  excess  of  expenses  over 
the  necessary  cost  of  production  leads  almost  inevitably  to  the 
discovery  of  means  for  eliminating  this  waste." 

A  somewhat  elementary  illustration  of  the  operation  of  such 
a  plan  is  given  in  Figure  3.  Reference  to  the  summarized  manu- 
facturing statement  (Form  A),  already  referred  to  in  connection 
with  material  and  labor,  will  show  that  the  burden  expense  is 
given  both  as  regards  the  actual  amount  spent  and  the  standard, 
as  follows: 

Actual  burden   $10,019.50 

Standard    8,808.50 

Excess  cost   •       1,211.00 

As  every  manufacturer  knows,  the  burden  charge  to  product 
tends  to  vary  inversely  to  the  volume  of  product,  as  a  certain 
proportion  of  the  expense  included  in  burden  is  in  the  nature 
of  a  fixed  charge  not  varying  with  the  production,  and  this  fea- 
ture of  burden  costs  is  the  underlying  cause  for  the  effort  made 
by  manufacturers  to  decrease  costs  by  increasing  production. 
In  Figure  3,  therefore,  a  distinction  is  made  between  these  fixed 
charges  and  those  of  a  fluctuating  character,  the  excess  of  total 
actual  burden  over  standard  burden  being  analyzed  as  follows : 


64 

Fixed  charges : 

Increase  due  to  variations  in  expenditures $787.00 

Increase  due  to  variations  in  production 129.20 

Fluctuating  charges : 

Increase  due  to  variations  in  actual  expense  compared 

with   standard   expense    294.80 

Total  increase   $1,211.00 

In  making  the  distinction  between  fixed  and  fluctuating  ex- 
penses it  is  assumed  that  careful  estimates  were  prepared  of 
what  the  expenses  should  be  in  order  to  handle  the  estimated 
production  of  3,000,000  bolts  per  month.  A  certain  organization 
would  be  required  to  carry  along  this  contract  which  would  not 
be  affected  by  minor  variations  in  production,  this  also  applying 
to  rent,  insurance,  etc.,  and  such  expenditures  would  be  included 
under  the  head  of  fixed  charges.  The  expenditures  coming 
under  the  head  of  fluctuating  charges  would  be  such  items  as 
tools,  machine  repairs,  and  power  which  would  tend  to  vary 
directly  with  the  production.  Foremen,  carried  on  a  monthly 
basis  in  this  case,  would  be  considered  as  a  fixed  charge. 

As  was  previously  indicated  two  factors  would  enter  into 
variations  between  the  actual  and  standard  fixed  charges,  those 
resulting  from  the  actual  expenditures  incurred  being  more  or 
less  than  the  estimates  or  standards  and  those  due  to  the  produc- 
tion being  at  variance  from  the  standard  or  estimate  of  3,000,000 
bolts  per  month  in  all  departments.  The  effect  of  the  first  of 
these  factors  is  the  loss  of  $787  shown  above,  which  amount 
would,  of  course,  be  analyzed  by  classes  of  expense  so  that  the 
increases  could  be  localized  and  steps  taken  to  eliminate  them 
from  future  statements.  As  regards  the  second  factor,  reference 
to  Form  D  on  Figure  3  will  show  that  whilst  the  standard 
production  was  realized  in  the  cut-off  department,  the  produc- 
tion of  the  heading,  pointing,  and  threading  departments  was 
100,000,  200,000  and  400,000  short  of  the  standard,  respect- 
ively. This  results  in  the  expenses  requiring  to  be  absorbed 
by  a  smaller  production  than  was  estimated,  or  an  increased 
cost  as  compared  with  standard  of  $129.20.  The  remedy  for 
the  plant  manager  to  apply  in  order  to  eliminate  this  item  of 
increase  on  the  succeeding  manufacturing  efficiency  statement 
is  obvious. 

In  the  standard  cost  (Form  I)  burden  is  figured  on  the  basis 
of  a  certain  number  of  standard  hours  at  a  standard  rate  per 
hour.     For  instance,  the  standard  burden  cost  for  the  heading 


65 

department  per  10,000  bolts  is  $13.50,  obtained  by  extending 
27  standard  liours  at  a  standard  rate  per  hour  of  $0.50.  This 
standard  rate  of  $0.50  is  divisible  into: 

Fixed    charges    $0.03  per  hour 

Fluctuating   charges    0.47  per  hour 

The  method  employed  in  ascertaining  variations  between 
actual  and  standard  burden  is  illustrated  in  Form  E  on  Figure  3, 
the  variations  Ijeing  figured  as  follows : 

Fixed   Charges 

Estimated  monthly  expense   for  handling  con- 
tract of  3,000,000  bolts  (Form  J) $243.00 

Actual  expense  for  month    (Form  E) 250.00 

Increase  due  to  fluctuations  in  expense $7.00 

Standard  hours  on  basis  of  3,000,000  bolts  per 

month    (Form  J)    8,100 

Standard    hours     earned     on     production     of 

2,900,000  bolts    ( Form   E) 7.830 

Decrease   in   standard   hours 270 

Standard  rate  per  hour $0.03 

Increase    due    to    production    being    less    than 

standard    $8.10 

Fluctu.vtixg   Ch.vrges 

Actual  expense  for  month   (Form  E) $3,962.00 

Standard    expense    for    month    7,830    standard 

hours  at  standard  rate  of  $0.47  per  hour..    3,680.10 


Increase  comparing  actual  with  standard $281.90 


Total   increase    $297.00 


2  Current  Costs 

In  Form  F  on  Figure  3  is  illustrated  the  method  by  which 
current  costs  can  be  obtained  by  adjusting  the  standard  cost  to 
the  basis  of  current  conditions  by  the  use  of  the  ratios  of  actual 
to  standard  cost  as  appearing  on  the  inventory  account  (Form 
H).  In  Form  H  the  adjustment  factors  for  labor  and  burden 
are  taken  in  total  instead  of  by  individual  operations,  a  slightly 


66 

different  result  being  obtained  by  figuring  the  adjustments  by 
the  factors  for  the  different  departments.  This  is  drawn  atten- 
tion to  at  this  point  in  order  to  emphasize  the  fact  that  all  costs 
must  be  more  or  less  approximate  however  elaborate  the  methods 
of  distribution  may  be,  and  in  many  cases  time  can  safely  be 
saved  by  using  averages  in  place  of  detailed  figuring,  especially 
in  the  event  that  the  figures  used  cover  a  period  of  several  months 
so  that  variations  in  work  in  progress  at  the  commencement 
of  the  period  and  the  close  are  so  small  as  to  very  little  affect 
the  final  result.  Of  course,  in  a  case  such  as  that  illustrated 
in  Figure  3,  where  one  very  simple  product  is  manufactured 
the  figuring  of  each  operation  by  its  individual  adjustment 
factors  would  be  a  matter  of  small  moment,  but  in  a  case  where 
it  is  necessary  to  adjust  the  standard  cost  of  a  machine  which 
embodies  a  thousand  or  more  parts  such  a  proposition  would 
involve  a  great  deal  of  detailed  work.  With  a  properly  designed 
system  how^ever  standard  costs  can  be  easily  and  safely  adjusted 
by  the  use  of  very  few  adjustment  factors. 

Standard  costs  can  be  used  not  only  as  a  basis  to  figure  costs 
under  current  conditions  but  also,  as  Mr.  Franklin  suggests,  as 
a  foundation  on  which  to  make  estimates  or  predictions  of  costs. 
In  this  connection  it  should  be  noted  that  to  obtain  the  fullest 
value  from  the  use  of  standard  costs  calls  for  the  exercise  of 
the  faculty  of  imagination  on  the  part  of  the  cost  accountant. 
The  ability  to  make  intelligent  forecasts  will  be  an  essential 
cjualification  of  the  cost  accountant  of  the  future,  and  the  demand 
which  will  come  for  a  wider  range  of  ability  on  the  part  of  the 
cost  accountant  cannot  fail  to  result  in  the  importance  of  his 
position  being  recognized,  and  its  status  raised  from  its  present 
rather  low  point  to  one  commensurate  with  the  essential  char- 
acter of  the  functions  it  performs. 


3  Cost  of  Sales 

The  method  illustrated  in  Figure  3  (Form  G)  for  ascertaining 
the  cost  of  sales  or  more  properly  of  shipments  is  the  same 
as  that  previously  described  for  figuring  current  costs,  the 
standard  cost  being  adjusted  to  the  basis  of  actual  conditions 
by  the  use  of  the  ratios  of  actual  to  standard  as  appearing  on 
the  inventory  account  (Form  H).  Reference  to  Form  G  will 
show  that  the  number  of  bolts  shipped  was  2,000,000,  compari- 
son between  the  standard  and  actual  cost  of  these  bolts  being: 


6^ 

as  shown  in  Table  5.     Table  6  gives  a  comparison  of  standard 
and  actual  profits. 

Table  5.     Actual  vs.  Standard  Cost  of  Bolt 


Actual  Cost 

Standard  Cost 

Increased  Cost 

Total 

Per 
10,000 

Total 

Per 
10,000 

Total 

Per 
10,000 

Material 

Labor 

Burden 

Totals.  .  .  . 

$14,252.40 

2,775-17 
7,066.98 

$24,094.55 

$71-26 
13-88 
35-33 

$120.47 

$13,320.00 
2,628.00 
6,210.00 

$22,158.00 

$66 . 60 
13-14 
31.05 

$110.79 

$932 . 40 
147.17 
856.98 

$1,936.55 

$4.66 
0.74 
4.28 

$9-68 

Table  6.     Actual  vs.  Standard  Profits  on  Bolts 


Actual 

Standard 

Increase  or  Decrease 

Total 

Per 
10,000 

Total 

Per 
10,000 

Total 

Per 
10,000 

Sales 

Cost  of  sales .  . 

Net  profit .... 

$26,000 .  00 
24,094.55 

$1,905.45 

$130.00 
120.47 

$9-53 

$26,000 .  00 
22,158.00 

$3,842.00 

$130.00 
110.79 

$19  21 

$1,936.55 
$1,936.55* 

$9.68 
$9.68* 

Decrease. 


Chapter  III 
THE    UNIVERSAL    LAW    OF    SYSTEM 

ALL  of  a  man's  most  cherished  possessions  will  not  be  found 
on  the  schedules  of  an  appraisal  of  his  property,  and  the 
assets  of  a  business  most  difficult  to  acquire  or  to  replace  do 
not  all  appear  on  its  balance  sheet.  Prosperity  and  even  the 
continued  existence  of  a  business  depend  as  much  upon  its  in- 
tangible assets,  upon  its  good  will,  its  policies  and  the  spirit 
of  its  organization  as  upon  its  buildings,  machinery,  and  other 
material  evidences  of  its  prosperity. 

Andrew  Carnegie  is  reported  to  have  stated  that  if  he  were 
compelled  to  take  his  choice  between  suffering  the  total  destruc- 
tion of  his  physical  properties  or  building  an  entirely  new 
organization  to  operate  his  business  he  would  choose  the  former 
alternative.  Master  of  organization  as  he  was,  the  shrewd  old 
Scotch  ironmaster  knew  full  well  that  while  machinery  can 
always  be  purchased  by  those  possessing  cash  or  credit  and  but 
a  few  months  would  be  required  to  replace  his  physical  plants, 
the  building  up  of  an  efficient  and  loyal  organization  must  neces- 
sarily be  the  work  of  years.  The  same  thought  was  admirably 
expressed  in  an  advertisement  of  a  well-known  manufacturer 
which  recently  appeared  as  follows: 

An  organization  may  be  likened  to  a  fine  machine.  It  may  be  well 
designed,  its  parts  maj^  be  accurately  made  and  carefully  assembled,  but 
its  highest  efficiency  is  reached  only  after  it  has  been  "run  in"  and  its 
components   brought   into   thorough   accord. 

The  "running  in"  process  of  the  machine  may  be  a  matter  of  days  or 
weeks,  but  in  a  huge  organization  it  is  a  matter  of  years. 

However  carefully  an  automobile  engine  may  be  assembled — 
however  finely  its  various  parts  may  be  fitted — it  should  run  a 
great  deal  better  after  being  operated  a  thousand  miles  than 
it  does  when  it  first  leaves  the  shops.  How  much  more  com- 
fortable than  the  brand  new  ones  we  purchase  are  the  well-worn 
shoes  and  the  ancient  hat  which  convention  makes  us  reluctantly 
discard, 

68 


69 

The  breaking-in  process — the  aboHshing  of  friction  by  means 
of  friction — is  a  necessary  incident  in  the  Hfe  of  all  machinery. 
Kipling  has  wonderfully  described  this  process  of  conflict  and 
adjustment  as  applied  to  inanimate  things  in  his  story  "The 
Ship  Which  Found  Itself"  : 

"Oh,  she's  no  so  bad,"  the  skipper  replied  cautiously.  "But  I'm  sayin' 
that  it  takes  more  than  christenin'  to  mak'  a  ship.  In  the  nature  o'  things, 
Miss  Frazier,  if  ye  follow  me,  she's  just  irons  and  rivets  and  plates  put 
into  the  form  of  a  ship.     She  has  to  find  herself  yet." 

"I  thought  Father  said  she  was  exceptionally  well  found." 

"So  she  is,"  said  the  skipper,  with  a  laugh.  "But  it's  this  way  wi'  ships. 
Miss  Frazier.  She's  all  here,  but  the  parts  of  her  have  not  learned  to 
work  together  yet.     They've  had  no  chance." 

"The  engines  are  working  beautifull}-.     I  can  hear  them." 

"Yes,  indeed.  But  there's  more  than  engines  to  a  ship.  Every  inch 
of  her,  ye'll  understand,  has  to  be  livened  up  and  made  to  work  wi'  its 
neighbour — sweetenin'  her,  we  call  it,  technically." 

"And  how  will  you  do   it?"  the  girl   asked. 

"We  can  no  more  than  drive  and  steer  her  and  so  forth;  but  if  we 
have  rough  weather  this  trip — it's  likely — she'll  learn  the  rest  by  heart. 
For  a  ship,  ye'll  obsairve.  Miss  Frazier,  is  in  no  sense  a  reegid  body  closed 
at  both  ends.  She's  a  highly  complex  structure  o'  various  an'  conflictin' 
strains,  wi'  tissues  that  must  give  an'  tak'  accordin'  to  her  personal  modulus 
of  elasteecity."  Air.  Buchanan,  the  chief  engineer,  was  coming  towards 
them.  "I'm  sayin'  to  Miss  Frazier,  here,  that  our  little  'Dimbula'  has  to 
be  sweetened  yet,  and  nothin'  but  a  gale  will  do  it.  How's  all  wi'  your 
engines.  Buck?" 

"Well  enough — true  by  plumb  an'  rule,  o'  course ;  but  there's  no 
spontaneeity  3-et."  He  turned  to  the  girl.  "Take  my  word,  Miss  Frazier, 
and  maybe  ye'll  comprehend  later;  even  after  a  pretty  girl's  christened  a 
ship  it  does  not  follow  that  there's  such  a  thing  as  a  ship  under  the  men 
that  work  her." 

Some  organizations  are  never  properly  "run  in";  there  are 
businesses  which  are  well  known  for  being  in  a  constant  condi- 
tion of  maladjustment,  for  being  places  of  discord  where 
changes  are  being  everlastingly  made  and  where  the  inevitable 
question  which  is  asked  when  the  latest  superintendent  or  general 
manager  arrives  is  "How  long  will  he  last?"  Such  concerns  are 
not  generally  very  great  profit  makers  and  the  pertinent  ques- 
tion which  might  also  be  asked  is  "How  long  will  the  business 
last  when  good  men  fight  shy  of  risking  their  reputations  by 
associating  themselves  with  a  concern  notorious  as  a  graveyard 
of  careers." 

The  most  important  problem  in  connection  with  the  develop- 
ment of  an  organization  is  undoubtedly  the  selection  of  a  per- 
sonnel of   suitable  calibre  and  capable  of  working  as  a  har- 


monious  unit.  Such  an  organization  will  "dig  itself  out"  despite 
handicaps  which  would  force  a  less  capable  organization  to 
the  wall.  It  does  not,  however,  come  within  the  province  of 
this  work  to  deal  with  this  feature  of  the  problems  of  organiza- 
tion even  if  the  author  felt  he  were  capable  of  discussing  this 
subject  authoritatively,  which  he  does  not,  but  there  is  another 
problem  in  connection  with  the  building  up  of  an  organization 
which  is  also  of  great  importance  and  wdiich  forms  the  major 
theme  of  this  chapter. 

In  order  to  render  the  policies  of  a  business  effective,  to 
multiply  its  usefulness  and  to  add  to  the  tangible  assets  and 
good  will  of  the  business,  in  addition  to  the  physical  equip- 
ment requisite  for  production,  distribution  and  administration 
the  organization  requires  some  kind  of  an  established  routine 
for  performing  the  various  operations  necessary  for  the  conduct 
of  the  business.  Such  a  series  of  standard  routine  methods  may 
properly  be  termed  the  "system"  of  a  business. 

An  organization  no  matter  how  good  its  personnel  may  be 
fails  to  realize  its  full  potential  effectiveness  if  its  routine 
methods  are  not  properly  formulated.  Easy  things  become  dif- 
ficult if  there  is  no  standardized  method  of  taking  care  of  them 
and  hard  things  are  rendered  harder.  The  most  efficiently  de- 
signed system  will  not  make  a  weak  organization  strong,  but  it 
will  render  it  more  effective  than  it  would  otherwise  be  and 
though,  as  previously  remarked,  a  strong  organization  will  fight 
its  w^ay  in  spite  of  obstacles  there  is  no  question  but  that  defect- 
ive routine  methods  are  a  severe  handicap  to  even  the  best  of 
organizations. 

It  does  not  necessarily  follow  that  a  strong  organization  will 
inevitably  develop  really  efficient  methods  of  handling  its  routine 
work.  Some  successful  businesses  with  which  the  author  has 
been  acquainted  have  achieved  their  success  in  spite  of  great 
defects  in  their  systems,  but  this  does  not  alter  the  fact  that 
they  w^ould  have  accomplished  more  if  their  methods  had  been 
more  efficient.  The  incompetency  of  its  competitors  is  the  salva- 
tion of  many  a  business.  Often  the  successful  ones  are  success- 
ful not  because  they  have  been  highly  efficient  but  because  they 
have  been  less  inefficient  than  others.  Let  us  take  a  concrete 
instance — that  of  cost  accounting  wath  wdiich  this  volume  deals. 
It  may  be  stated  that  many  a  concern  whose  name  is  a  household 
word  does  not  know^  what  its  goods  cost  to  make,  or  on  what 
lines  its  profits  are  realized.  Considered  from  the  standpoint 
of   furnishing   the   manufacturer   with   information   relative  to 


71 

operating  efficiencies  and  there  is  probably  not  one  cost  system 
in  a  hundred  which  may  be  considered  to  meet  reasonable 
requirements. 

Unfortunately  the  word  "system"  is  associated  in  the  minds 
of  many  with  the  memory  of  unsatisfactory  experiments  con- 
ducted in  its  name  by  those  who  have  confused  external  details 
with  fundamental  principles  and  because,  for  instance,  in  apply- 
ing the  principles  of  system  it  has  been  found  convenient  and 
expedient  to  use  standard  printed  forms  have  endeavored  to 
obtain  results  merely  by  introducing  a  multiplicity  of  printed 
forms  without  possessing  a  knowledge  of  underlying  principles. 

The  dangerous  tendency  of  the  half-educated  and  superficial 
thinker  is  to  lose  his  bearings  in  a  sea  of  detail,  and  to  mistake 
surface  variations  for  basic  principles.  The  liability  to  lose 
sight  of  the  essential  unity  of  things  is  very  evident  in  many 
offices  where  there  is  a  marked  tendency  to  imagine  that  if  the 
most  approved  mechanical  devices  are  employed  the  office  can- 
not fail  to  realize  a  high  degree  of  effectiveness. 

Printed  forms  and  mechanical  devices  such  as  adding  ma- 
chines, duplicating,  calculating,  sorting,  billing,  tabulating  and 
time-recording  machines  have  their  place  and  are  of  great  value, 
but  an  office  may  be  equipped  with  all  of  these  and  yet  if  the 
methods  emplo3'ed  are  not  founded  upon  correct  principles  satis- 
factory results  wall  not  be  obtained. 

No  one  is  more  fully  wedded  to  the  principles  of  scientific 
management  than  the  author  or  has  a  greater  appreciation  of 
the  sterling  value  of  what  has  been  accomplished  by  the  real 
thinkers  and  workers  in  this  field,  but  when  he  considers  some 
of  the  things  which  have  been  done  by  the  type  of  gentleman 
who  imagines  that  the  purchase  of  a  stop  watch  and  a  hurried 
reading  of  Mr.  Knoeppel's  "Installing  Efficiency  Methods"  is  all 
that  is  required  to  be  fully  equipped  to  render  adequate  service 
in  the  industrial  field,  he  is  inclined  to  paraphrase  a  well-known 
saying  and  exclaim,  "Oh  Frederick  Taylor,  in  thy  name  what 
sins  have  been  committed !" 

The  efficiency  expert  was  not  very  active  in  Great  Britain  in 
the  days  when  H.  G.  Wells  wrote  his  story  "Kipps"  in  1905, 
but  Mr.  Wells'  description  in  this  story  of  the  "fishent"  Shalford 
seems  strangely  reminiscent  of  one  type  of  "expert"  some  of  us 
have  known: 

Emerging  in  the  shop  again  among  a  litter  of  toys  and  what  are  called 
"fancy  articles"  Shalford  withdrew  a  hand  from  beneath  his  coat-tails  to 
indicate  an  overhead  change  carrier.     He  entered  into  elaborate  calculations 


72 

to  show  how  many  minutes  in  one  year  were  saved  thereby  and  lost  himself 
among  the  figures — "Seven  times  eight  seven  nine^was  it?  or  seven  eight 
nine?  Now,  noiv — Why  when  I  was  a  boy  your  age  I  c'd  do  a  sum  like 
that  as  soon  as  hear  it — We'll  soon  get  yer  into  better  shape  than  that. 
Make  you  Fishent.  Well  y'r  must  take  my  word,  it  comes  to  pounds  and 
pounds  saved  in  a  year — pounds  and  pounds — System !  System  every- 
where,  Fishency. 

They  passed  into  a  yard  and  Mr.  Shalford  waved  his  hand  to  his 
three  delivery  vans  all  striped  green  and  yellow — "Uniform — green,  yell'r — 
System."  All  over  the  premises  were  pinned  absurd  little  cards :  "This 
door  locked  after  7:30 — By  order  Edwin  Shalford,"  and  the  like. 

He  never  stipulated  for  so  many  months'  credit  but  bought  in  November 
"as  Jan."  It  was  not  only  words  he  abbreviated  in  his  London  com- 
munications. In  paying  his  wholesalers  his  "system"  admitted  of  constant 
error  in  discount  of  a  penny  or  twopence,  and  it  "ficilitated  business"  he 
alleged,  to  ignore  odd  pence  in  the  cheques  he  wrote.  His  Ledger  Clerk 
was  so  struck  with  the  beauty  of  this  part  of  the  system  that  he  started 
a  private  one  on  his  own  account  with  the  stamp  box  that  never  came  to 
Shalford's  knowledge. 

The  spirit  of  the  old  proverb  "give  a  dog  an  ill  name  and 
hang  him"  applies  to  words  as  well  as  canines,  but  unfortunately 
we  cannot  find  substitutes  for  discarded  words  as  easily  as  we 
can  replenish  our  kennels,  and  as  there  is  no  other  word  which 
so  satisfactorily  conveys  the  same  idea  as  that  of  "system"  the 
paucity  of  our  language  renders  it  necessary  to  retain  it  in  our 
vocabulary.  Under  these  conditions  the  best  course  to  follow 
is  to  clear  its  character  of  the  false  impressions  which  have 
become  associated  with  it  by  determining  its  true  meaning.  "Sys- 
tem" in  a  standard  dictionary  is  defined  as  being:  A  whole 
plan  or  scheme,  consisting  of  many  parts  connected  in  such  a 
manner  as  to  create  a  chain  of  mutual  dependencies.  Obviously 
under  this  definition  we  live  in  a  world  of  systems  and  of  sys- 
tems within  systems,  the  universe  as  a  whole  being  one  immense 
system  embracing  incalculable  billions  and  billions  of  minor  sys- 
tems from  that  of  the  system  of  which  our  sun  is  the  centre 
down  to  the  respiratory  system  of  a  gnat  dancing  in  that  sun's 
declining  rays. 

In  dealing  with  system  therefore  we  are  discussing  no  mean 
thing  and  in  endeavoring  to  apply  its  basic  principles  in  the 
operation  of  our  business  we  are  really  engaged  in  an  effort  to 
bring  the  same  into  tune  with  the  fundamental  laws  of  nature. 


73 


Unity  Underlying  Systems 

As  an  indication  of  the  unity  which  we  might  expect  to  find 
underlying  all  systems,  whether  of  philosophy,  of  business,  or 
of  the  universe,  it  is  interesting  to  note  the  close  parallelism 
existing  between  the  system  of  the  human  body  and  that  of  an 
established  business.  The  development  of  the  former  has  been 
the  result  of  untold  ages  of  experiment,  of  trial  and  error,  and 
of  the  operation  of  the  inexorable  law  of  the  survival  of  the 
fittest,  and  yet  in  many  respects  man  has  instinctively  adopted 
the  methods  of  the  body  in  the  solution  of  the  complex  business 
problems  which  have  been  the  growth  of  the  last  few  hundred 
years  and  mainly  of  the  last  few  decades. 

One  of  the  most  difficult  and  complex  problems  which  required 
solution  in  the  evolution  of  the  human  body  was  the  finding 
of  some  means  whereby  a  multitude  of  routine  duties  could  be 
carried  along  without  conflicting  with  the  performance  of  opera- 
tions calling  for  the  exercise  of  the  higher  faculties.  This  prob- 
lem was  solved  by  the  development  of  the  nervous  system,  as 
to  which  Professor  David  Fraser  Harris  in  his  book  entitled 
"Nerves"  writes: 

Now  it  is  very  natural  at  this  point  to  ask  what  exactly  is  the  nervous 
system  for.  ...  It  is  first  of  all  for  carrying  out  certain  activities,  such 
as  breathing,  on  a  subconscious  plane,  over  which  the  constant  supervision 
of  consciousness  would  he  tedious  if  it  were  not  impossible  considering  the 
enormous  number  of  demands  made  upon  the  attention  of  the  individual. 
It  is  in  the  next  place  for  carrying  out  certain  activities  with  the  greatest 
possible  speed  compatible  with  the  greatest  possible  accuracy. 

Now,  in  the  operation  of  a  business  we  are  confronted  with 
a  similar  problem  to  that  solved  for  the  body  by  the  develop- 
ment of  the  nervous  system — namely,  to  find  some  means 
whereby  an  immense  number  of  routine  operations  can  be  per- 
formed quickly,  accurately,  economically,  and  with  a  minimum 
of  supervision  on  the  part  of  the  business  executive.  The  solu- 
tion of  the  problem  in  both  cases  has  been  practically  identical, 
in  the  body  the  conscious  mind  has  been  relieved  of  an  over- 
whelming burden  by  handing  over  routine  duties  to  the  nervous 
system,  while,  in  the  case  of  business,  standard  methods  of 
performing  routine  duties  have  been  devised  and  installed,  in 
which  methods  the  organization  is  so  drilled  that  its  perform- 
ance of  these  is  more  or  less  automatic. 


74 

As  regards  the  tremendous  advantages  realized  by  the  body 
from  its  nervous  system,  Professor  Harris  states: 

Nerves  and  the  nervous  system  not  only  protect  the  individual  from 
injury  enabling  him  to  seek  food,  avoid  or  overcome  enemies ;  but  they  are 
constantly  handing  over  some  activity  or  other  from  the  conscious  to  the 
subconscious  realm.  .  .  .  We  educate  the  nervous  system  laboriously  to 
perform  certain  actions,  conscious  attention  being  very  much  concerned  in 
the  acquisitions,  but  by  degrees  these  acquisitions  are  relegated  to  the 
unconscious  or  at  least  subconscious  realm  and  are  at  last  carried  on 
without  the  interposition  of  attention  at  all.  There  is  a  very  great  saving 
of  nerve  energy  here;  things  so  done  are  called  habits. 

The  first  steps  taken  by  a  child  call  for  the  concentrated  use 
of  the  conscious  mind  but  after  the  method  of  walking  has  been 
firmly  established  the  nervous  system  takes  over  this  function 
and  most  of  the  time  that  the  adult  is  walking  he  is  hardly  even 
conscious  of  the  fact.  The  first  time  we  ride  on  a  bicycle  there 
is  a  desperate  trial  of  our  conscious  faculties,  but  after  the  habit 
has  been  acquired  the  business  becomes  entirely  mechanical,  so 
much  so  in  fact  that  in  long  distance  bicycle  races  the  rider  has 
been  known  to  ride  while  asleep.  More  than  once  was  it  noticed 
by  the  men  in  the  boat  that  the  cross-channel  swimmer  Holbein 
was  asleep  though  still  swimming,  and  we  are  all  familiar  with 
the  absent-minded  way  in  which  when  interested  in  a  conversa- 
tion at  the  table  we  help  ourselves  to  the  sugar  without  losing 
for  one  moment  the  thread  of  the  conversation. 

One  of  the  most  remarkable  instances  on  record  of  the 
automatic  functioning  of  the  mind  is  that  embodied  in  an 
anecdote  related  by  Mr.  Edison  and  which  appears  in  one  of 
his  biographies  as  follows: 

I  noticed  an  imm.ense  crowd  gathering  in  the  street  outside  a  newspaper 
office.  I  called  the  attention  of  the  other  operators  to  the  crowd,  and  we 
sent  a  messenger  boy  to  find  the  cause  of  the  excitement.  He  returned 
'in  a  few  minutes  and  shouted  "Lincoln's  shot."  Instinctively  the  operators 
looked  from  one  face  to  another  to  see  which  man  had  received  the  news. 
All  faces  were  blank,  and  every  man  said  he  had  not  taken  a  word  about 
the  shooting.  "Look  over  your  files,"  said  the  boss  to  the  man  handling 
the  press  stuff.  For  a  few  minutes  we  waited  in  suspense,  then  one  man 
held  up  a  sheet  of  paper  containing  a  short  account  of  the  shooting  of 
the  President.  The  operator  had  worked  so  mechanically  that  he  had 
handled  the  news  without  the  slightest  knowledge  of  its  significance. 

In  the  days  when  the  author  was  an  articled  clerk  to  a 
chartered  accountant,  it  was  the  custom   (and  probably  still  is 


75 

lor  while  the  EngHsh  are  a  conservative  people  the  English 
accountants  are  doubly  so)  for  the  accounting  student  to  obtain 
his  initiation  into  the  mysteries  of  the  accounting  profession 
by  spending  many  months  in  performing  the  most  uninteresting 
routine  work,  probably  50  per  cent  of  which  was  the  checking 
of  footings.  This  operation  after  a  time  became  an  absolutely 
automatic  one,  so  much  so  in  fact  that  when  two  articled  clerks 
were  occupied  in  this  work  they  could  engage  in  a  rapid-fire 
conversation  without  in  any  degree  neglecting  their  work  or 
slackening  its  speed,  in  fact  the  author  found  that  the  less  he 
concentrated  on  this  work  the  more  accurate  he  would  be.  In 
this  country  the  adding  machine  has  rendered  the  capacity  to 
add  figures  rapidly  and  accurately  a  rare  accomplishment  and 
the  author  remembers  an  instance  in  one  office  when  he  found 
a  young  man  who  had  written  down  on  a  slip  of  paper  six 
items  totalling  less  than  a  thousand  dollars  and  climbed  two 
flights  of  stairs  to  use  an  adding  machine  rather  than  perform 
the  severe  mental  effort  of  adding  them  in  his  head ! 

Though  on  first  consideration  it  may  seem  like  an  absurd 
waste  of  time,  this  severe  drilling  in  monotonous  routine  work 
which  the  English  accountant  student  has  to  go  through,  it  has 
its  advantages,  for  in  addition  to  strengthening  his  faculty  of  con- 
centration it  also  develops  a  kind  of  second  sight,  so  much  so 
that  the  thoroughly  trained  accountant  when  performing  an 
investigation  for  fraud  will  often  instinctively  question  an  entry 
which  on  the  face  of  it  appears  to  be  perfectly  correct.  At  least 
the  author  found  this  to  be  the  case  in  his  own  work  along 
these  lines  and  imagines  that  other  accountants  have  had  the 
same  experience.     As  Dr.  Frank  Crane  puts  it: 

A  human  being  is  more  than  a  mind.  He  is  a  compHcated,  amazing 
machine,  a  mysterious  compound  of  spirit  and  matter.  What  he  can  do 
depends  not  only  upon  the  thought  of  his  brain  but  on  the  thoughts  that 
have  got  themselves  into  his  fingers,  his  eyes,  his  feet  and  his  impulses. 
I  may  learn  the  rule  of  three  out  of  a  book  so  that  I  can  say  it  backward, 
but  I  am  not  a  good  accountant  until  my  spinal  cord  has  learned  it. 

An  important  feature  in  connection  with  the  more  or  less 
automatic  functioning  of  the  nervous  system  in  carrying  out 
routine  operations  is  the  fact  that  though  this  system  is  at  all 
times  ready  to  relieve  the  conscious  mind  of  the  necessity  of 
performing  routine  operations,  in  so  doing  it  will  not  vary  one 
iota  from  the  manner  in  which  the  performance  was  laid  down 
by  the  conscious  mind  and  it  is  to  this  peculiarity  that  we  rightly 
attribute  the  importance  of  acquiring  good  habits. 


However,  as  Ralph  Waldo  Emerson  in  his  essay  on  "Com- 
pensation" stated:  "Everything  has  two  sides.  Every  advantage 
has  its  tax,"  and  the  individual  who  takes  advantage  of  the 
benefits  resulting  from  being  able  to  relieve  the  conscious  mind 
of  the  necessity  of  supervising  the  performance  of  routine  duties 
cannot  avoid  the  acceptance  of  the  corresponding  responsibility 
and  of  the  danger  of  permitting  the  facility  of  the  nervous 
system  in  this  connection  to  result  in  the  formation  of  bad 
habits. 

Occasionally  parents  w4io  desire  their  children  to  become 
skilled  in  the  art  of  playing  some  musical  instrument  make  the 
mistake  at  the  outset  of  employing  semi-skilled  instructors  to 
undertake  the  initial  training  of  the  child,  to  find  in  after  years 
when  they  call  upon  a  master  in  the  art  to  "finish"  the  pupil's 
education,  that  the  work  already  done  has  been  worse  than  use- 
less, more  effort  being  required  to  break  the  old,  bad  habits  than 
to  acquire  the  new,  right  ones. 


Bad  Business  Habits 

Bad  habits  are  as  detrimental  to  a  business  as  to  an  individual. 
Incorrect  methods  of  performing  routine  work  once  firmly  estab- 
lished cannot  be  corrected  without  a  struggle.  The  path  recom- 
mended may  be  far  shorter  than  the  one  now  followed,  but 
to  take  it  involves  the  trouble  of  blazing  a  new  trail  and  of 
getting  out  of  the  old  rut  w^hereas  to  continue  along  the  well- 
w^orn  and  familiar  path  is  to  follow  the  line  of  least  resistance. 

Unfortunately,  in  many  cases  it  is  not  possible  to  adopt  the 
ideal  plan  of  carefully  formulating  our  methods  before  we  em- 
bark on  our  business  venture  and  by  this  means  acquiring  good 
routine  habits  at  the  outset,  though  this  plan  has  been  followed 
successfully  by  some  foresighted  executives  launching  new 
undertakings  on  a  fairly  large  scale.  In  the  great  majority 
of  cases,  however,  the  problem  presented  involves  not  only  the 
determination  of  what  the  correct  methods  should  be,  but  also 
the  necessity  of  breaking  away  from  established,  defective  rou- 
tine before  the  improved  methods  can  be  introduced. 

According  to  the  definition  previously  given  the  idea  of  sys- 
tem is  that  of  a  number  of  interrelated  and  interdependent  parts 
so  connected  as  to  form  a  complex  whole  and  the  attainment 
of  perfection  in  this  whole  not  only  demands  perfection  in  the 
individual  parts,  but  also  requires  the  attainment  of  the  same 


77 

standard  in  the  adjustment  or  balancing  of  the  parts  with  one 
another.  Broadly  speaking,  no  business  problems  are  strictly 
intradepartmental,  what  affects  one  department  in  some  degree 
affects  all  the  others.  In  the  average  business,  however,  this 
fact  is  in  large  measure  overlooked  and,  due  partly  to  the  fact 
that  each  department  is  generally  left  to  work  out  its  own 
salvation  unaided  and  partly  owing  to  jealousy  of  any  encroach- 
ment upon  their  particular  domain,  the  department  heads  devise 
ways  and  means  of  meeting  their  own  particular  needs  without 
much  reference  to  how  these  methods  conform  to  the  require- 
ments of  related  departments.  Under  these  conditions  such 
coordination  as  is  realized  is  more  the  result  of  dire  necessity 
than  of  a  carefully  thought  out  plan  under  which  the  interest 
of  the  business  is  paramount  and  that  of  the  department  or 
individual  subordinate  thereto. 


Why  Business  Methods  Fall  Short 

It  is  rarely  in  a  large  business  that  any  person  can  be  found 
who  is  able  to  completely  recite  the  routine  followed  in  the 
handling  of  an  order  from  its  receipt  in  the  mail  throughout 
all  the  intermediate  operations  up  to  the  final  shipping  and  bill- 
ing of  the  material  nor  is  it  often  found  that  any  attempt  has 
been  made  to  analyze  such  routine  with  a  view  to  eliminating 
duplication  of  work  and  overlapping  of  authority.  Under  such 
conditions  it  is  hardly  to  be  wondered  that  the  methods  employed 
fall  far  short  of  the  ideal. 

As  an  illustration  of  the  ramifications  involved  in  the  modern 
manufacturing  institution  there  is  shown  in  Figure  4  a  repre- 
sentation of  the  operations  involved  in  the  handling  of  an  order 
in  a  concern  where  the  requirements  though  complex  are  not 
by  any  means  exceptional.  A  consideration  of  this  diagram, 
which  covers  only  a  small  section  of  the  routine  work  of  a  large 
organization,  will  indicate  how  extremely  difficult  it  would  be 
for  the  average  mind  to  visualize  clearly  the  innumerable  rela- 
tions and  operations  involved  in  the  conduct  of  modern  business 
without  the  assistance  of  drawings  illustrating  these  in  complete 
detail.  Unless  the  practice  of  machine  design  is  followed  and 
all  the  parts  of  the  plan  or  scheme  and  their  various  interrela- 
tionships are  clearly  shown  on  paper  it  is  practically  impossible 
to  determine  where  the  routine  employed  involves  duplication 
of  authority  and  effort  and  working  at  cross-purposes,  where 


78 

methods  of  check  are  defective  or  overlap  and  where  essential 
requirements  are  overlooked  and  non-essentials  introduced.  Due 
to  the  absence  of  such  diagrams,  the  conception  in  the  mind 
of  the  average  shop  or  office  employee  of  the  methods  employed 
in  the  operation  of  a  business  outside  of  his  own  immediate 
duties  is  little  more  than  a  blur  and  this  applies  to  the  ordinary 
routine  work  of  an  office,  to  the  methods  of  accounting  employed 
and  to  the  system  of  controlling  the  progress  of  work  through- 
out the  shops.  It  would  be  difficult  to  overestimate  the  educa- 
tional value  of  a  series  of  diagrams  illustrating  all  of  the  routine 
of  the  business  rendering  it  possible  for  every  member  of  the 
organization  to  obtain  an  intelligent  conception  of  the  business 
as  a  whole  and  of  the  relationship  of  his  particular  work  to 
the  general  plan. 


Procedure  in  Planning  Routine  Work 

In  laying  out  any  plan  of  routine  work  the  logical  procedure 
to  be  followed  is  to  first  clearly  define  the  ends  which  it  is 
desired  to  attain  and  then  to  determine  the  simplest  and  most 
effective  means  of  realizing  them.  This  statement  would  seem 
so  obvious  that  it  may  be  thought  that  this  plan  would  be  fol- 
lowed in  a  general  way  by  every  man  of  intelligence,  but  the 
author  has  come  across  cases  where  years  have  been  spent  in 
an  endeavor  to  introduce  satisfactory  cost-finding  methods  by 
men  who  at  no  time  have  possessed  anything  more  than  the 
vaguest  idea  of  what  they  were  endeavoring  to  achieve.  To 
minds  like  these  the  reverse  of  the  logical  procedure  is  followed; 
instead  of  laying  down  a  general  plan  and  then  formulating 
the  details  to  fit,  they  start  out  with  small  refinements  here  and 
there  trusting  ultimately,  doubtless,  to  be  able  to  coordinate  these 
disconnected  ideas  in  one  grand  plan.  It  is  not  by  any  means 
unusual  to  find  cost  accountants  who  have  endeavored  to  develop 
such  refinements  of  burden  distribution  that  an  attempt  is  made 
to  apportion  the  cost  of  heat  and  light  to  departments  and  sub- 
departments,  but  who  have  overlooked  such  essentials  as  the  con- 
trol of  raw  material.  The  author  knows  of  one  case  where 
a  store  accounting  system  was  introduced  under  which  it  was 
necessary  for  one  clerk  to  devote  his  entire  time  to  keeping  track 
of  the  cost  of  bolts,  nuts,  and  screws  which  involved  an  expendi- 
ture of  considerably  less  than  his  salary,  and  yet  under  this 
plan  several  hundred  thousand  dollars  of  other  material  was 


79 

shown  on  the  books  as  being  on  hand  when  as  a  matter  of 
fact  it  had  been  used  in  the  manufacture  of  product  shipped  and 
billed  months  before. 

There  will  continue  to  be  wasted  efforts  in  connection  with 
cost  accounting,  such  as  have  been  described,  until  manufac- 
turers generally  obtain  a  better  conception  of  the  results  they 
can  legitimately  demand  of  their  cost  accountants.  The  average 
manufacturer  does  not  really  know  what  information  he  should 
expect  his  accountant  to  furnish  him,  and  as  a  rule  his  demands 
fall  far  short  of  what  should  be  considered  reasonable.  Even 
such  limited  information  as  he  calls  for,  however,  cannot  be 
furnished  under  the  more  generally  accepted  cost  accounting 
methods,  the  limitations  of  which  will  be  fully  appreciated  if 
the  results  obtained  therefrom  are  considered  in  the  light  of  the 
list  of  reasonable  recjuirements  of  a  cost  system  given  in  the 
first  chapter  of  this  volume. 


Special  Qualifications  Needed  to  Design  a  Cost 
Accounting  System 

As  soon,  however,  as  the  manufacturing  world  breaks  away 
from  the  older  idea  of  retrospective  cost  accounting  and  accepts 
the  newer  and  broader  conception  of  predetermined  costs  there 
will  come  a  fuller  appreciation  of  the  dignity  and  importance 
of  cost  accounting.  Instead  of  as  at  present  expecting  a  more 
or  less  inexperienced  cost  clerk  to  work  out  his  own  salvation 
in  the  design  of  cost  finding  methods  or  calling  for  the  assist- 
ance of  professional  accountants  whose  experience  in  the  main 
has  been  confined  to  auditing  and  financial  investigation  work, 
the  manufacturer  of  the  future  will  undoubtedly  employ  the 
services  of  consulting  cost  experts  not  only  experienced  in  the 
principles  of  accounting,  but  skilled  in  their  application  to  meet 
the  needs  of  the  manufacturer.  Sooner  or  later  it  will  be 
generally  realized  that  the  designing  end  of  cost  accounting 
work  calls  for  special  qualifications  not  necessary  for  the  opera- 
tion of  a  cost  system,  and  that  only  in  very  large  institutions 
does  it  pay  to  retain  as  cost  accountant  a  man  with  the  extensive 
training  and  special  ability  necessary  to  design  systems  to  meet 
the  needs  of  the  complex  modern  business  machine. 

The  work  of  designing  svstems  of  cost  accounting  to  meet 
modern  industrial  conditions  demands  a  thorough  training  in 
the  application  of  accounting  principles  which  public  accountants 


8o 

are  better  able  to  obtain  than  accountants  outside  the  profession, 
and  this  field  of  cost  accounting  would  seem  to  offer  attractive 
possibilities  to  this  profession.  Until  professional  accountants, 
however,  realize  that  an  extended  experience  in  auditing  and 
investigation  work  in  itself  is  not  sufficient  to  qualify  a  man 
to  solve  cost  accounting  and  allied  industrial  problems,  their 
efforts  in  this  direction  will  continue  to  be  unsatisfactory. 


The  Basic  Features  of  a  Simple  Cost  System 

In  the  previous  chapter  there  was  illustrated  a  plan  of  standard 
or  predetermined  cost  accounting  to  meet  an  exceedingly  simple 
and  in  fact  practically  impossible  situation  in  which  the  business 
of  a  manufacturer  was  confined  to  the  making  of  a  single  size 
of  machine  bolt.  The  plan  there  submitted  illustrated  the  general 
principles  underlying  the  author's  methods  of  using  prede- 
termined costs  in  connection  with  obtaining  information  as  to 
manufacturing  efficiencies,  current  costs  and  costs  of  sales. 

Figure  5  is  a  diagram  illustrating  the  basic  features  of  a  simple 
cost  system  to  meet  more  complex  conditions,  the  business  taken 
as  an  example  being  one  in  which  various  kinds  of  machines 
of  a  standard  character  are  manufactured  involving  the  making 
and  assembling  of  a  large  number  of  parts  and  the  performance 
of  several  times  as  many  operations.  This  plan  has  been  drawn 
up  to  demonstrate  that  it  is  possible  to  design  a  system  of 
standard  or  predetermined  costs  which  will  meet  the  most  essen- 
tial requirements,  giving  results  not  possible  under  the  expensive 
and  detailed  retrospective  cost  systems  and  yet  involving  a 
minimum  of  clerical  work  both  in  the  shops  and  the  offices. 

A  plan  such  as  is  illustrated  in  Figure  5  is  especially  suitable 
for  a  concern  where  it  is  desired  to  obtain  the  essential  cost 
information  necessary  for  the  proper  operation  of  the  business 
with  the  least  possible  disturbance  and  expense,  leaving  the 
development  of  the  system  as  regards  the  production  of  refine- 
ments of  information  until  some  later  time  when  the  organiza- 
tion has  been  gradually  educated  to  the  point  of  demanding 
and  being  able  to  use  such  refinements  of  data  as  will  be  illus- 
trated later. 

An  essential  requirement  of  the  retrospective  cost  systems  in 
vogue  is  the  obtaining  of  complete  detailed  distributions  of  the 
time  of  productive  workers.  If  an  operator  is  working  on  15 
or  20  different  jobs  during  the  day  in  order  to  be  able  to  operate 


\ 


6.  CHARTER     HARRISON.' 

31  Nassou  S+peet. 
NenYorkCty 


NOTE 

*  INDICATES   RED  FI6URE.TQREPRESe.NT  INCREASED  COST. 


Fig.  5. — Diagram  illustrating  essential  features  of  a  simple  system  of  predetermined  costs  for  a  manufacturer  of  a  varied  line  of  machines. 


the  cost  system,  it  is  necessary  to  figure  the  elapsed  time  for 
every  one  of  these  operations.  In  some  factories  there  is  a 
serious  loss  of  time  owing  to  the  necessity  for  men  leaving  their 
machines  and  taking  a  card  to  be  stamped  upon  the  completion 
of  every  job. 

Under  the  author's  methods  of  cost  accounting  the  informa- 
tion that  is  considered  of  prime  importance  is  that  John  Brown's 
pay  this  month  was  $76,  whereas  the  standard  value  of  the 
work  he  did  was  only  $59.  The  question  of  the  amount  of  time 
he  spends  on  individual  jobs  is  considered  of  relatively  minor 
importance,  the  outstanding  and  dominant  fact  being  that  John 
Brown  as  a  whole  is  not  a  profitable  investment.  Once  prede- 
termined costs  have  been  figured  for  each  operation,  to  ascertain 
the  relation  between  John  Brown's  pay  and  the  value  of  John 
Brown's  production  is  a  simple  matter,  all  that  is  necessary  being 
to  obtain  a  list  of  the  work  that  John  Brown  did,  to  price  this 
out  at  the  rates  for  such  work  included  in  the  standard  costs 
and  to  compare  the  total  so  obtained  with  the  amount  paid.  In 
the  illustration  given  in  Figure  5,  the  accounting  is  along  even 
simpler  lines  than  this,  the  production  for  a  whole  department 
being  figured  at  standard  rates  and  compared  with  the  direct 
payroll  of  the  department.  To  extend  the  plan,  however,  to 
show  individual  labor  efficiencies  would  be  a  simple  matter. 

The  plan  illustrated  in  Figure  5  will  be  considered  briefly  both 
from  the  standpoint  of  the  results  obtained  and  from  that  of 
the  methods  necessary.  The  results  obtained  from  this  plan 
are  reflected  in  Forms  K,  L  and  M  as  follows: 

Form  K — Summarised  Manufacturing  Statement.  The 
ability  to  bring  to  a  focus  on  a  single  sheet  of  paper  the  essential 
facts  relative  to  the  trend  of  manufacturing  costs  is  an  out- 
standing feature  of  the  methods  of  cost  accounting  which  the 
author  describes  in  this  volume.  In  later  chapters  he  will  illus- 
trate methods  which  greatly  enhance  the  usefulness  of  the 
summarized  manufacturing  statement  by  analyzing  by  "causes" 
the  various  increases  and  decreases  in  cost,  comparing  actual 
with  standard,  but  even  the  simple  form  shown  in  Figure  5 
presents  features  which  can  hardly  fail  to  interest  the  manu- 
facturer of  an  exceedingly  varied  line  of  product  who  is  ac- 
customed to  receiving  the  kind  of  cost  statements  emanating 
from  the  average  cost  department.  Under  the  plan  illustrated, 
instead  of  voluminous  statements  showing  expenditures  without 
relation  to  standards,  and  detailed  schedules  of  the  cost  of  the 


82 

machines  completed  during  the  month,  the  manufacturer  has 
laid  before  him  a  statement  which  gives  him  a  bird's-eye  view 
of  the  situation.  Such  a  statement  will  show  him  to  what 
extent  he  has  failed  to  realize  his  objective  and  will  clearly 
indicate  where  to  look  for  the  trouble.  It  does  not  matter 
whether  he  is  manufacturing  a  hundred  different  kinds  of  ma- 
chines or  whether  the  operations  involved  total  to  the  tens  of 
thousands,  in  this  single  statement  rendered  possible  by  the  inex- 
pensive and  simple  plan  illustrated  all  of  the  manifold  fluctuations 
in  costs  are  brought  to  a  focus  so  that  the  statement  is  as  definite 
and  clear  as  if  instead  of  manufacturing  a  complex  and  varied 
product  he  were  producing  a  single,  elementary  product  such 
as  Portland  cement. 

The  faculty  of  being  able  to  classify  a  myriad  of  facts  and 
reduce  them  to  a  few  simple  statements  is  what  distinguishes 
scientific  methods  from  those  of  empiricism.  Someone  once 
very  rightly  stated  that  science  is  built  up  of  facts  as  a  house 
is  built  of  stones,  but  that  an  accumulation  of  facts  is  no  more 
a  science  than  a  heap  of  stones  is  a  house,  and  the  primary 
defect  in  the  established  methods  of  cost  accounting  is  that  in- 
stead of  furnishing  the  executive  wath  the  completed  edifice  to 
which  he  should  be  entitled  they  present  him  w'ith  a  heap  of 
stones  out  of  which  he  is  expected  to  construct  something  of 
utility. 

Ralph  Waldo  Emerson  once  remarked:  "There  is  at  the  sur- 
face infinite  variety  of  things ;  at  the  centre  there  is  simplicity 
and  unity  of  cause,"  and  the  causes  underlying  cost  variations 
in  businesses  however  dissimilar  and  diversified,  are  essentially 
the  same.  Cost  accounting  cannot  be  considered  to  be  scientific 
until  it  recognizes  this  fact  and  provides  the  means  for  determin- 
ing the  basic  and  fundamental  facts  relative  to  the  conduct  of 
a  business,  and  distinguishing  these  from  a  mass  of  inconse- 
quential detail. 

The  summarized  manufacturing  statement  illustrated  in 
Figure  5  (Form  K)  provides  a  comparison  between  the  actual 
and  standard  costs  of  all  manufacturing  operations  for  the 
month  and  for  previous  months.  Increases  are  shown  in  red 
and  decreases  in  black  and  all  data  analyzed  under  significant 
heads  as  follows: 

(a)  Material  by  classes 

(b)  Labor  by  departments 

(c)  Burden  by  departments  and  general  expense. 


83 

Form  L — Adjusted  Cost  of  Sales  and  Profit  and  Loss  State- 
ment. This  provides  a  comparison  of  the  actual  and  standard 
cost  of  the  goods  shipped  in  the  month,  such  costs  being  analyzed 
under  the  same  arrangement  as  is  provided  on  the  summarized 
manufacturing  statement. 

Form  M — Current  Cost  of  Machine.  This  provides  for  ob- 
taining the  current  cost  of  a  machine  by  adjusting  its  standard 
cost  to  the  basis  of  actual  conditions  by  the  use  of  the  ratios 
of  actual  to  standard  cost  of  the  various  classes  of  material, 
labor  and  burden  as  appearing  on  the  summarized  manufactur- 
ing statement. 

To  obtain  the  information  enumerated  above,  it  is  necessary' : 

1  For  predetermined  costs  to  be  compiled  of  all  manufac- 

turing operations  undertaken,  the  classification  of  such 
cost  data  conforming  to  that  used  on  Forms  K,  L,  and 
]\I — namely : 

(a)  Material  by  classes. 

(b)  Labor  by  departments. 

(c)  Burden  by  departments  and  general  expense. 

The  method  followed  in  compiling  the  standard  or  prede- 
termined costs  is  illustrated  in  Forms  A,  B,  and  C. 

2  To  provide  means  for  obtaining  the  standard  cost  of  all 

work  done  arranged  under  the  classification  followed 
in  the  compilation  of  the  standard  costs  and  in  the 
sunmiarized  manufacturing  statement.  This  medium 
is  provided  in  the  monthly  summarized  production  re- 
port (Form  D).  In  this  form  the  work  produced  in 
a  department  is  extended  at  the  labor  and  material 
rates  as  appearing  on  the  standard  costs. 

3  To  provide  accounts  in  which  to  snnunarize  the  informa- 

tion collected  relative  to  the  actual  and  standard  cost 
of  the  various  classes  of  material,  labor,  and  burden. 
This  requirement  is  met  by  the  inventory  accounts — 
Forms  E,  F,  G,  and  H. 

4  To  provide  a  medium  for  extending  shipments  at  standard 

cost.     This  is  furnished  by  Form  J. 


84 


Figuring  Standard  Costs  of  Material 

The  figuring  of  standard  costs  is  comparatively  simple  when 
the  uses  to  which  such  costs  are  to  be  put  are  known.  For  in- 
stance, one  of  the  important  advantages  of  standard  costs  is  that 
by  their  use  the  cost  of  material  in  a  machine,  no  matter  when 
the  cost  was  compiled,  can  be  adjusted  with  facility  to  the  basis 
of  current  conditions.  In  the  case  of  the  windstacker  cost 
shown  in  Form  C  on  Figure  5  it  will  be  seen  that  the  total 
standard  cost  of  the  lumber  in  the  many  parts  of  which  this 
machine  is  comprised  totals  to  $15.43.  In  obtaining  the  current 
cost  of  the  lumber  in  this  machine  (Form  M)  by  the  use  of 
the  ratio  of  116. 7  per  cent  of  the  actual  to  standard  cost  of 
lumber,  obtainable  from  the  lumber  work  in  process  account 
(Form  F),  we  obtain  a  current  cost  of  lumber  in  the  windstacker 
of  $18.01. 

In  compiling  standard  material  costs  the  following  rules 
should  be  remembered: 

1  Material  should  always  be  figured  in  standard  costs  at 

the  same  price, 

2  The  material  classification  adopted  should  be  suf^ciently 

detailed  to  provide  for  the  ratio  of  actual  to  standard 
cost  for  a  material  class,  as  shown  by  the  inventory 
accounts,  representing  approximately  the  ratio  between 
the  actual  and  standard  cost  of  the  material  in  that 
class  for  each  important  item  of  product. 

As  regards  the  first  of  the  above  rules,  assuming  that  forgings, 
for  instance,  are  purchased  on  a  flat  price  per  pound  basis — 
it  matters  little  from  the  standpoint  of  obtaining  current  costs 
of  the  forgings  in  a  machine  whether  the  standard  price  of 
forgings  is  taken  as  10  cents  per  pound  or  50  cents  per  pound, 
so  long  as  forgings  are  always  figured  in  standard  costs  at  the 
same  price  per  pound.  For  instance,  suppose  that  in  IVIachine 
A  there  are  50  pounds  of  forgings  and  in  Machine  B  there 
^^^  75  pounds,  on  the  basis  of  a  standard  forgings  cost  of 
10  cents  per  pound  the  standard  cost  of  the  forgings  in  Machines 
A  and  B  will  be  $5  and  $7.50,  respectively,  and  on  the  basis  of 
50  cents  per  pound  $25  and  $37.50,  respectively.  Assuming 
that  the  actual  cost  of  forgings  is  15  cents  per  pound,  then  the 
comparison  between  actual  and  standard  cost  would  appear  on 


8s 

the  records  as  shown  by  Table  7.  And  using  the  ratios  given  in 
Table  7  in  adjusting  the  standard  cost  of  forgings  to  the  basis 
of  current  conditions  gives  identical  results  as  shown  in  Table  8. 


T.\BLE    7.      ACTU.VL    vs.    St.\KD.\RD    CoST    OF    FORGINGS 


Pounds 

Actual  Cost 

Standard  Cost 

.^     .      Actual 
Ratio  — 

Per  Pound 

Total 

Per  Pound 

Total 

Per  Cent 

5,000 
5,000 

$0.15 
0.15 

$750 
750 

$0.10 
0.50 

$500 
2500 

150 
30 

Table  8.     Adjusted  Standard  Costs  of  Forcings 


Standard  Cost  of  Forgings 

Actual 

Ratio ; — , 

Standard 

Per  Cent 

Adjusted 

Machine 

Per  Pound 

Total 

Cost 

A 

10 
10 

50 
50 

$  5  00 

750 

25.00 

37  50 

150 

150 

30 

30 

$  7-50 

11.25 

750 

11.25 

B 

A 

B 

The  extent  of  refinement  necessary  in  the  classification  of 
material  costs  depends  very  largely  upon  the  character  and 
variety  of  product  manufactured.  In  some  cases  where  ap- 
proximately the  same  proportions  of  the  different  classes  of 
material  would  be  used  in  all  the  machines  manufactured  it 
would  probably  be  found  that  approximately  correct  results 
would  be  obtained  if  all  material  were  carried  in  one  account 
and  an  average  ratio  of  actual  to  standard  obtained.  On  the 
other  hand,  it  may  be  necessary  to  introduce  considerable  refine- 
ments in  the  classification,  for  instance,  where  in  a  small  size 
machine  the  steel  used  might  be  practically  entirely  of  base  price 
stock  while  in  a  large  machine  it  might  be  mainly  of  material 
with  "extras."  In  view  of  the  fact  that  the  base  price  of 
materials  is  constantly  fluctuating  while  the  extras  are  rarely 


86 

changed  it  follows  that  the  use  of  one  adjustment  factor  to  cover 
variations  in  the  cost  of  the  material  as  a  whole  will  result 
in  an  increase  in  the  base  price  of  material  causing  an  over- 
charge to  the  machine  using  extras  and  a  corresponding  under- 
charge to  the  machine  using  base  price  material.  For  instance, 
suppose  the  standard  base  price  of  the  steel  to  be,  say,  $2  and 
in  the  large  machine  all  of  the  steel  used  to  take  an  extra  of 
20  cents,  the  standard  cost  of  the  steel  in  these  machines  would 
be  as  shown  in  Table  9: 


Table  9.     Standard  Cost  of  Steel  for  Machines 


Base 

Extras 

Machine 
Size 

Pounds 

Price 
per  100 
Pounds 

Amount 

Pounds 

Price 
per  100 
Pounds 

Amount 

Small 

500 
1000 

$2.00 
2.00 

$10.00 
20.00 

1000 

$0.20 

Large 

$2.00 

Assuming  that  the  purchases  during  the  period  under  review 
totalled  50,000  pounds  at  a  base  price  of  $3,  25,000  pounds 
of  which  represented  extra  price  stock,  a  comparison  of  actual 
to  standard  would  be  as  shown  in  Table  10.    The  adjusted  cost 

Table  10.    Comparison  of  Actual  and  Standard  Costs  of  Machines 


Base 

Extras 

Total 

Pounds 

50,000 

$3.00 
$1,500.00 

$2.00 
$1,000.00 
150 

25,000 

$0 .  20 
$50 . 00 

$0.20 
$50.00 
100 

Actual  Cost: 

Per  100  pounds 

Total 

$1,550.00 

Standard  Cost: 

Per  100  pounds 

Total .  . 

$1,050.00 
147 

Ratio,  actual  to  standard,  per  cent. . . 

87 

of  the  steel  in  the  two  machines,  assuming  that  no  distinction 
had  been  made  in  the  accounting  for  base  and  extras,  would 
then  be  as  shown  by  Table  ii.     If,  however,  a  distinction  had 


Table  ii.     Adjusted  St.vndard  Cost  of  Machines 


Machine  Size 


Small . 
Large . 


Standard 
Cost  of 
Machine 


$10.00 
22.00 


Ratio 


Actual 


Standard 
per  cent 


147 
147 


Adjusted 
Cost 


$14.70 
32.34 


been  made  in  the  accounting  as  regards  base  and  extras  the 
adjusted  steel  costs  would  be  as  shown  by  Table  12.     So  that, 


Table  12.     Adjusted  Standard  Cost  of  Machines — Base  and  Extra  Costs 

Given  Separately 


Base 

Extras 

Machine  Size 

Standard 
Cost 

Actual 

Ratio 

Standard 

Per  Cent 

Adjusted 
Cost 

Total 

Small 

Large 

$10.00 
20.00 

150 
150 

$15.00 
30.00 

$2.00 

$15.00 
32.00 

as  was  previously  stated,  unless  the  classification  provides  for 
distinguishing  between  base  and  extras,  an  increase  in  price 
w^ould  tend  to  undercharge  the  machine  not  using  extras  at  the 
expense  of  the  machine  using  extras. 

In  actual  practice  it  will  rarely  be  found  that  this  refinement 
in  classification  is  necessary  and  as  a  general  rule  a  classification 
of  material  under  from  10  to  20  heads  will  meet  all  requirements. 


Figuring  Standard  Costs  of  Labor  and  Burden 

The  ideal  method  of  figuring  standard  labor  costs  is  to  apply 
the  established  methods  of  scientific  management  and  make  care- 
ful time  studies  for  all  operations,  using  the  standard  times  so 
obtained  as  the  basis  of  standard  costs.  In  actual  practice,  how- 
ever, it  is  not  always  feasible  to  follow  this  procedure,  desirable 
as  it  may  be,  and  this  particularly  applies  to  the  undertakings 
with  which  the  author  is  familiar  where  it  is  necessary  within 
the  period  of  a  few  months  to  install  a  complete  system  of 
standard  costs  for  an  extensive  and  elaborate  line  of  product, 
such  as  for  instance  in  the  agricultural  implement  field  where 
several  hundreds  of  different  styles,  types,  and  sizes  of  machines 
are  manufactured  by  one  concern  and  in  the  silverware  business 
where  the  number  of  different  articles  manufactured  runs  into 
the  tens  of  thousands.  In  these  cases  if  it  were  necessary  to 
defer  the  installation  of  the  cost  system  until  scientifically 
determined  standards  were  available  for  all  operations  years 
might  be  consumed  in  this  undertaking  and  during  this  period  the 
benefits  derivable  from  the  operation  of  a  standard  system  of 
cost  accounting  would  be  largely  absent.  In  such  cases  it  is 
often  the  part  of  wisdom  to  take  advantage  of  data  already 
compiled  by  the  existing  cost  system  and  to  tentatively  set  the 
standard  times  on  the  basis  of  the  records  of  past  performance. 
This  plan  enables  a  system  of  standard  costs  to  be  installed 
with  the  utmost  speed  and  many  of  the  benefits  derivable  from 
such  a  system  to  be  realized  immediately,  and  as  was  noted  in 
a  previous  chapter  no  particular  difficulty  is  involved  in  sub- 
stituting the  scientific  standards  as  these  are  determined  for 
the  original  standards  based  on  past  results.  Furthermore,  the 
operation  of  a  system  of  standard  costs  has  remarkable  educa- 
tional value  in  developing  the  right  viewpoint  in  an  organization 
and  the  author  calls  to  mind  cases  where  his  first  suggestion 
that  time  studies  should  be  made  was  received  very  coldly  but 
after  the  cost  system  was  in  operation  for  a  time  and  the  sug- 
gestion again  made  it  was  adopted  with  enthusiasm. 

One  of  the  important  advantages  to  be  derived  from  the  use 
of  time  standards  in  a  complex  industry  even  if  these  standards 
are  based  purely  upon  past  results  is  that  though  comparisons 
between  the  actual  and  standard  cost  at  any  given  time  may  not 
in  themselves  be  of  great  significance,  comparisons  from  month 
to  month  show  unmistakably  the  trend  of  costs,  bringing  these 


89 

data  to  a  focus  in  a  manner  not  feasible  under  the  usual  systems 
of  retrospective  cost  accounting.  Assume  the  comparison 
between  actual  and  standard  time  under  such  a  plan  for  several 
months  to  be  as  follows : 

Base 

Actual  Standard 

Hours  Hours 

January  5000  4000 

February    6642  5400 

March    5310  4500 

April   5969  4700 

May    5324  4400 

Now  if  it  is  desired  to  show  the  efficiency  of  labor  in  the  months 
of  February  to  May,  with  that  existing  in  the  month  of  January, 
all  that  is  necessary  is  to  adjust  the  standard  for  the  former 
months  to  the  January  actual  basis  by  using  the  ratio  of  actual 
to  standard  for  that  month.  Thus  the  actual  hours  of  5000 
in  January  represent  125  per  cent  of  the  standard  hours  of 
4000  and  using  this  factor  of  125  per  cent  for  the  standard 
of  the  other  months  gives  the  following  comparisons  with  the 
January  efficiency: 

Adjusted 

Standard 
Hours      Hours      Increase  Decrease 

January    5000  5000 

February    66-42         6750  108 

March    5310         5625  315 

April    5969  5875  94 

May    5324         5500  176 

It  should  be  understood  that  the  author  does  not  recommend 
the  use  of  standards  of  past  performance  except  as  a  temporary 
but  nevertheless  valuable  expedient  and  in  fact  as  was  stated 
in  the  previous  chapter  he  considers  that  such  systems  as  that 
of  Mr.  Leitch's,  which  are  founded  entirely  on  a  comparison  of 
present  with  past  results  are  unsound. 

When  speed  is  of  extreme  importance  in  the  introduction  of 
cost  methods,  and  often  it  is  of  vital  importance,  the  most  satis- 
factory results  can  be  obtained  by  the  use  of  past  results  coupled 
with  a  series  of  assays  or  tests  for  the  purpose  of  determining 
the  average  efficiency  in  the  different  departments  and  opera- 
tions. If  the  observations  made  are  sufficiently  extensive  and 
representative,  the  law  of  averages  may  be  relied  upon  to  give 


90 

approximate  correct  results  and  reliable  efficiency  statements 
compiled  without  requiring  the  making  of  time  studies  for  more 
than  a  fraction  of  the  operations  involved  in  the  conduct  of  the 
business.  The  method  of  adjusting  the  past  results  to  the  basis 
of  lOO  per  cent  efficiency  is  similar  to  that  just  described  for 
making  comparisons  of  the  showings  of  different  months  with 
one  another  and  may  be  illustrated  as  follows: 

Assume  that  a  series  of  assays  or  tests  shows  that  the  average 
efficiency  of  a  machine  shop  is  79  per  cent,  and  that  reliable 
records  of  past  results  have  been  used  for  the  purpose  of  figuring 
base  standards.  Assume  further  that  the  comparison  of  actual 
hours  with  base  standards  for  a  given  month  is  as  follows: 

Actual  hours    7600 

Base  standard  hours  figured  on  past  results.  .  .  .  7980 
Current  efficiency,  per  cent,  using  past  results 

as   standard    105 

The  actual  efficiency  of  the  machine  shop  for  the  month  is 
only  82.95  per  cent,  made  up  as  follows: 

Standard  hours,  based  on  past  results 7980 

Average   efficiency,   per  cent  of  machine   shop 
comparing    100    per    cent    standards    with 

past   results    79 

100  per  cent  standard  hours  produced  in  month 

7980X79  per  cent 6304.2 


Actual  efficiency  per  cent:  —^~ 82.95 


In  Figure  6  is  illustrated  the  method  followed  in  figuring 
standard  costs  in  a  business  where  a  large  variety  of  hollow 
silverware  is  manufactured.  The  example  shown  in  the  illus- 
tration is  that  of  a  kettle  which  comprises  a  number  of  different 
parts  made  of  various  kinds  of  material  and  involving  the  per- 
formance of  numerous  operations.  The  method  of  figuring  the 
standard  labor  for  one  department,  namely  the  press  department, 
is  illustrated  in  Form  B  (standard  operation  and  labor  card). 
On  this  form  provision  is  made  for  showing  the  standard  times 
(in  hours  and  tenths)  for  the  different  operations  on  the  various 
parts,  the  time  for  each  operation  on  all  of  the  parts  in  total 
being  figured  at  the  standard  rate  per  hour  for  each  operation, 
and  the  grand  total  of  the  hours  and  standard  labor  cost  for 


91 

the  department  being  carried  to  the  standard  cost  sheet 
(Form  C). 

The  method  of  liguring  tlie  standard  material  is  iUustrated 
on  the  standard  material  sheet  (Form  A),  sufficient  detail  being 
shown  on  this  form  to  render  further  explanation  unnecessary. 
The  total  standard  material  cost  and  the  standard  value  of  the 
scrap  are  posted  from  the  standard  material  sheet  to  the 
standard  cost  sheet   (Form  C). 

In  designing  the  plan  illustrated  it  was  not  thought  necessary  to 
introduce  machine  rates  for  the  purpose  of  distributing  burden 
to  costs,  the  burden  being  analyzed  by  departments  and  dis- 
tributed in  proportion  to  the  standard  labor.  The  total  standard 
hours  for  the  department  as  well  as  the  amount  of  standard 
labor  being  posted  to  the  standard  cost  sheet  (Form  C),  the 
standard  burden  can  be  figured  either  as  a  standard  per  cent  of 
the  standard  labor  or  as  a  standard  rate  per  hour.  Both  methods 
are  shown  in  the  illustration  on  Form  C  as  follows: 

Method  A  Method   B 

Standard    Percentage    of    Stand-  Standard   Rate  per  Hour 
ard  Labor 

Standard  labor 44-21  Standard  hours    79.2 

Standard  burden  rate,  per  Standard  rate  per  hour..       0.75 

cent    135 

Standard  burden   59.68  Standard  burden    62.73 

In  certain  classes  of  business  the  distribution  of  burden  depart- 
mentally  in  proportion  to  the  standard  hours  or  the  standard 
labor  meets  all  practical  requirements  but  this  method  in  other 
cases  will  give  results  w^hich  are  seriously  inaccurate,  an  illus- 
tration being  given  in  the  previous  chapter  of  a  case  where  the 
distribution  of  burden  on  a  departmental  basis  resulted  in  one 
class  of  work  being  charged  with  ten  and  a  half  tinies  as  much 
burden  as  it  should  properly  have  borne.  Under  such  conditions 
it  is  necessary  to  introduce  a  svstem  of  machine  rates,  the  ad- 
vantages and  possibilities  of  which  will  form  the  subject  matter 
of  the  succeeding  chapter. 


Chapter  IV 
THE  PRINCIPLES  OF  BURDEN  DISTRIBUTION 

THE  successful  solution  of  cost  accounting  problems  demands 
the  exercise  in  large  measure  of  the  faculty  of  judgment, 
for  it  requires  the  ability  to  visualize  the  numerous  factors 
involved  in  their  proper  perspective  and  to  adopt  the  plan  in 
which  the  benefits  to  be  gained  most  outweigh  the  disadvantages. 

In  passing  judgment  as  to  which  is  the  best  system  of  cost 
accounting  to  meet  any  situation  it  is  necessary  to  weigh  care- 
fully the  importance  of  the  various  elements  involved,  to  decide 
for  instance  whether  a  limitation  of  the  scope  of  the  information 
with  a  resultant  decrease  in  the  expense  of  operating  the  plan 
is  desirable  or  not,  or  whether  the  benefits  to  be  derived  from 
an  increased  refinement  in  the  methods  of  burden  distribution 
will  more  than  offset  the  delay  in  the  preparation  of  monthly 
statements  occasioned  by  this  change. 

The  system  most  suitable  to  meet  the  needs  of  a  business 
will  invariably  be  found  to  be  more  or  less  of  a  compromise. 
In  cost  accounting,  the  law  of  compensation  applies — what  we 
gain  in  one  place  we  lose  in  another ;  what  we  save  by  employing 
incompetent  and  inaccurate  clerks  we  lose  from  the  errors  they 
make,  and  what  we  gain  in  speed  in  the  compilation  of  informa- 
tion we  pay  for  by  limitations  in  its  scope. 

In  Figure  7  is  illustrated  a  plan  in  which  the  advantages  to 
be  derived  from  simplicity  in  design  were  deliberately  sacrificed 
in  order  to  obtain  more  important  benefits.  The  problem  solved 
in  the  plan  illustrated  may  be  briefly  stated  as  follows : 

The  product  manufactured  was  metalware  of  great  variety  marketed  in 
different  lines,  the  profit  and  loss  on  which  it  was  necessary  to  show  sepa- 
rately. Most  of  the  articles  made  comprised  a  number  of  parts,  dif- 
ferent kinds  and  grades  of  material  being  used  in  making  these  parts.  Scrap 
was   salvaged   from   numerous   operations   all   along   the   line. 

It  was  necessary  under  the  general  plan  employed  to  obtain  a  distribu- 
tion of  the  material  used  and  scrap  salvages  by  lines  of  product  and  the 
problem  was  rendered  particularly  difficult  as  it  by  no  means  followed  that 
the  form  of  the  material  used  as  a  basis  in  figuring  the  stj>ndard  costs  would 
be   followed  in   actual  practice.     The   standard   cost,   for   instance,   miglit  be 

92 


SCRAP  •  CLEARANCE     ACCOUNT 

Sfqndard  Volua    _£<?*     PSr  POwnd . 


I 


OIAGRAU  ILtUSTRATING  TKBOPERATION  OF  AN  ACWJimTING  Pl/AN 
EXCB801NGLV  COMPLEX  IN  DESIGN  Biff  VERY  INEXPEWSIVE  AND  SIMPLE  IN  OPERATION 
G.  CHARTER     HARRISON. 


Fig.  7.— Diagram  illustrating  the  operation  of  an  accounting  plan  exceedingly  complex  in  design  but  very  inexpensive  and  simple  in  operation. 


ITo  fact  fagt  <>!. 


93 

figured  on  the  assumption  that  a  special  cut  shape  would  be  used  whereas 
if  such  a  shape  were  not  available  a  metal  sheet  might  be  used  in  place 
thereof. 

Regarding  this  problem  solely  from  the  standpoint  of  sim- 
plicity of  design,  it  is  obvious  that  the  plan  to  adopt  would  be 
to  maintain  records  showing  for  each  part  manufactured  the 
gross  material  used  and  the  scrap  produced  in  the  various  opera- 
tions involved.  Such  a  plan,  however,  would  necessitate  very 
numerous  weighings  of  material  and  scrap  and  the  material  used 
being  somewhat  expensive  these  weighings,  to  get  accurate 
results,  would  have  to  be  made  very  carefully.  In  addition, 
a  very  great  deal  of  clerical  work  would  be  necessary  both  in 
the  office  and  the  shop. 

By  the  adoption  of  a  plan  exceedingly  complicated  in  design 
(though  simple  enough  in  actual  operation)  it  was  rendered 
possible  to  obtain  all  results  desired  without  necessitating  the 
weighing  of  scrap  from  individual  pieces.  In  such  a  case  the 
complexity  of  design  is  of  small  moment  if  the  adoption  of 
a  simple  plan  requires  an  immense  amount  of  work  on  the 
part  of  the  shop  and  office  employees.  Far  too  often  unneces- 
sary weighing  operations  are  called  for  by  cost  accountants 
which  result  not  only  in  retaining  needless  weighmasters  on  the 
payroll  but  are  also  a  handicap  to  the  business  in  slowing  up 
production.  Some  weighing  operations  are  worse  than  useless, 
an  example  of  which  is  the  weighing  of  such  scrap  as  turnings 
loaded  with  oil  and  dirt.  Some  thought  given  to  devising 
methods  of  obtaining  the  results  desired  with  one  or  more  less 
weighing  operations  will  often  prove  a  profitable  investment  and 
as  the  plan  illustrated  in  Figure  7  is  applicable  to  meet  a  by 
no  means  uncommon  situation  a  study  of  this  diagram  and  the 
following  description  of  the  plan  is  recommended  to  those  who 
are  not  entirely  satisfied  that  their  weighing  expense  is  not  un- 
necessarily high. 


The  ]\Iethod  of  Obtaixixg  Actual  and  Standard 
Material  by  Lines 

Material  will  be  divided  into  a  few  main  classes  arranged 
according  to  the  general  description  of  the  material  concerned. 
Each  main  class  will  Ije  sub-divided  according  to  a  more  detailed 
description  covering  gauge,  size  and  shape.  Two  sets  of  accounts 
will  be  maintained,   viz. :    the   controlling  accounts   which   will 


94 

relate  to  the  main  classes  only,  and  be  carried  in  both  standard 
and  actual  figures,  and  the  detail  or  material  accounts  which 
will  be  carried  in  Cjuantities  only,  the  latter  being  maintained 
by  the  storekeeper  for  his  own  guidance  and  to  prove  controls. 

The  purchase  records  of  the  general  books  will  be  designed 
in  such  a  manner  as  to  provide  an  analysis  of  material  purchases 
by  main  classes  and  the  periodical  totals  of  these  analyses  W'ill 
be  recorded  in  the  material  controlling  accounts  (Form  B) 
under  the  main  caption  of  received,  and  sub-captions  of  quantity 
and  actual  cost.  The  standard  value  under  the  main  caption 
of  received  will  be  obtained  by  multiplying  the  cpantity  received 
by  the  cost.  Standard  material  values  will  be  established  at 
a  figure  which  will  include  freight  and  in  compiling  the  purchase 
records  in  the  general  books  the  freight  will  be  extended  to  the 
column  of  the  analysis  relating  to  the  particular  class  of  material 
in  respect  to  which  it  was  incurred. 

The  material  recjuisition  card  (Form  C)  has  been  designed  to 
provide  the  following  information: 

1  Material  account  number  which  indicates  both  class  and 

account  numbers 

2  Actual  weight  issued 

3  Standard  cost  of  material  issued 

4  Standard  cost  of  material  in  product 

5  Line  of  product 

6  Class  of  scrap 

7  Standard  value  of  scrap  in  production 

As  material  is  issued  by  the  storekeeper  the  weight  issued 
will  be  recorded  on  the  material  recjuisition  card  (Form  C), 
the  issues  thereon  being  extended  at  the  standard  material  cost 
per  unit  of  weight.  The  units  of  product  will  be  extended  at 
the  unit  material  and  scrap  values  as  shown  on  the  standard 
cost  of  parts  card  (Form  A).  Monthly,  or  as  often  as  may  be 
desired,  the  cards  will  be  sorted  by  class  of  material  and  the 
issues  credited  to  the  material  controlling  account  at  standard 
material  cost,  adjustment  to  actual  being  made  by  using  the 
ratio  between  actual  and  standard  shown  on  the  received  side 
of  the  record.  The  cards  will  be  re-sorted  by  line  of  product 
and  tabulation  made  of  the  standard  cost  of  material  issued 
and  the  standard  cost  of  material  in  product.  These  figures 
will  be  posted  to  the  debit  of  the  work-in-process  accounts  for 
each  line  and  the  standard  material  costs  adjusted  to  actual  by 
using  the  ratio  shown  on  the  material  controlling  account.     The 


95 

above  process  will  provide  the  ratio  between  the  standard  cost 
of  material  in  [)rodiict  and  the  actual  value  of  the  material  used 
in  manufacture. 

Under  the  accounting  plan  here  described,  which  is  based 
upon  the  use  of  standards  of  material,  quantity,  and  price,  it 
is  necessary,  in  order  to  be  able  to  determine  the  eflk-iency 
realized  in  the  use  of  material  as  also  the  material  cost  by  lines, 
for  the  records  to  show  the  extent  of  the  variations  between 
standard  and  actual  material  cost.  This  problem  is  rendered 
particularly  difficult  as  it  by  no  means  follows  that  the  form 
of  the  material  used  as  a  basis  for  figuring  standard  costs  will 
be  followed  in  actual  practice.  For  instance,  the  standard  cost 
may  be  figured  on  the  assumption  that  a  cut  shape  will  be  used, 
whereas  when  a  shape  is  not  available  a  sheet  may  be  used  in 
place  thereof. 


The  Method  of  Obtaining  Actual  and  Standard  Scrap 

BY  Line 

No  particular  problem  presents  itself  as  regards  recording 
the  variation  between  standard  and  actual  in  the  material  issued 
but  the  difficulty  which  exists  is  as  regards  ascertaining  the 
effect  of  the  resultant  variation  in  scrap  comparing  actual  with 
standard  as  obviously  it  would  not  be  possible  except  at  great 
expense  to  figure  the  scrap  produced  on  each  order. 

In  the  plan  here  presented  a  solution  has  been  arrived  at 
based  upon  the  fact  that  an  increase  in  material,  owing  to  the 
material  used  being  in  different  form  to  that  contemplated  in 
standard,  will  tend  to  result  in  a  corresponding  increase  in  the 
scrap  which  should  be  produced  and  vice  versa.  Accordingly 
the  general  plan  here  presented  is  as  follows: 

The  material  requisition  card  (Form  C)  is  designed  to  show: 

I.  The  standard  cost  of  material  issued  (that  is  the  actual 
weight  issued  extended  at  the  standard  price) 

2  The  standard  cost  of  the  standard  material  in  the  product 

(that  is  the  standard  weight  extended  at  the  standard 
price) 

3  The  standard  value  of  the  standard  scrap  to  be  salvaged 

from  the  product 

Now  obviously  the  difference  between  (i)  and  (2)  represents 
the  difference  between  the  actual  and  standard  weight  of  material 


96 

used  extended  at  the  standard  price  and  is  a  direct  index  of 
the  fluctuation  in  the  cjuantity  of  material  issued  as  compared 
with  standard.  Reverting  to  the  statement  above  to  the  effect 
that  an  increase  in  material  issue  owing  to  a  variation  in  the 
form  of  the  material  used  as  compared  with  standard  will  tend 
towards  a  corresponding  increase  in  scrap  production,  it  would 
follow  that  if  the  variations  in  scrap  of  each  class  are  obtained 
in  total  an  approximately  correct  distribution  of  this  variation 
by  lines  of  product  can  be  made  by  distributing  the  variation 
to  lines  proportionately  to  the  total  variations  of  material  quan- 
tities as  obtained  from  (i)  and  (2)  above. 

Though  this  plan  considered  from  the  standpoint  of  the 
design  of  the  system  may  be  regarded  as  complex,  it  presents 
an  exceedingly  valuable  feature  as  regards  economy  of  operation 
of  the  system,  for  under  this  method  scrap  does  not  require  to 
be  weighed  on  the  individual  order,  all  that  is  necessary  being 
to  obtain  the  total  production  of  each  class  of  scrap  periodically. 
This  production  can  be  figured  either  by  periodically  weighing 
the  scrap  produced  or  if  preferred  it  can  be  obtained  by  taking 
into  account  the  sales  of  scrap  and  figuring  the  inventory  of 
scrap  on  hand  at  the  close  of  the  month. 

The  standard  value  of  scrap  in  production  will  be  obtained 
by  sorting  the  material  requisition  cards  (Form  C)  by  scrap 
class  numbers  and  tabulating  the  standard  scrap  production 
column.  The  total  for  each  class  of  standard  scrap  will  be 
charged  to  the  "standard  scrap  in  product"  column  of  the  appro- 
priate scrap  clearance  account  (Form  H). 

As  previously  stated,  the  actual  scrap  production  will  be  ob- 
tained by  weighing  the  production  of  each  class  of  scrap  pro- 
duced periodically.  Scrap  produced  will  be  valued  on  the  basis 
of  the  amount  realized  from  scrap  sales. 

Standard  scrap  production  will  be  distributed  to  classes  of 
product  by  sorting  the  material  recjuisition  cards  by  line  numbers 
and  tabulating  the  standard  scrap  production  column.  Varia- 
tions between  standard  and  actual  scrap,  as  previously  explained, 
will  be  distributed  to  product  lines  proportionately  to  the  varia- 
tions between  the  actual  and  standard  quantities  of  material 
chargeable  to  the  lines. 

By  the  method  here  described  for  handling  scrap  transactions, 
calculations  of  scrap  production  are  made  on  the  basis  of  prices 
realized  during  the  current  period.  Unsold  balances  of  scrap 
will  be  carried  to  the  scrap  inventory  account  (Form  K)  and 
then  sold,  any  profit  or  loss  occasioned  by  the  ultimate  price 


97 

realized  being  under  or  over  the  price  current  at  the  time  of 
the  vakiation  of  the  production  being  carried  direct  to  the  profit 
and  loss  account. 

Before  it  is  possible  to  ascertain  the  amount  of  scrap  that 
is  to  be  transferred  to  the  scrap  inventory  account,  it  will  be 
necessary  to  credit  the  scrap  clearance  account  witli  the  actual 
and  standard  values  of  scrap  used  in  production.  The  current 
price  of  scrap  so  used  will  be  charged  to  the  scrap  reclamation 
account  (Form  J)  where  labor  on  reclamation  will  also  be 
charged,  thus  making  a  total  of  scrap  metal  and  labor  on  reclama- 
tion which  represents  the  cost  of  producing  blanks  from  scrap. 

In  as  much  as  nearly  all  blanks  are  bought  from  the  outside, 
it  is  proper  to  credit  the  scrap  reclamation  account  with  the 
value  of  such  blanks  at  the  price  for  which  they  are  purchased 
on  the  outside,  carrying  any  balance  to  the  credit  or  debit  of 
profit  and  loss  account,  as  representing  additional  profit  or  loss 
to  the  profit  or  loss  made  in  the  regular  course  of  operation. 

The  credit  to  scrap  reclamation  account  for  blanks  made  will 
be  ofTset  by  a  corresponding  debit  to  the  appropriate  material 
account:  in  the  latter  account  the  entry  in  the  actual  column 
being  the  amount  credited  to  scrap  reclamation,  the  entry  in  the 
standard  column  being  the  regular  standard  cost  of  the  blank. 


Burden  Distribution  a  Matter  of  Judgment 

The  exercise  of  the  faculty  of  judgment  is  of  particular  im- 
portance when  determining  methods  to  be  employed  in  connec- 
tion with  burden  distribution.  There  is  no  one  plan  of  distribu- 
tion applicable  to  all  classes  of  business,  and  refinements  of 
distribution  which  in  one  case  would  be  of  the  utmost  impor- 
tance in  another  would  be  absurd.  For  instance,  in  a  business 
such  as  that  of  the  manufacture  of  bolts  and  nuts  where  the 
cost  of  tools  is  very  great  and  where  high  efficiency  of  operation 
depends  very  largely  upon  the  wearing  quality  of  tools,  it  is 
necessary  that  the  system  of  cost  accounting  should  provide  com- 
plete data  relative  to  tool  costs  and  tool  efficiencies.  In  some 
other  lines  of  business  tool  cost  is  relatively  unimportant.  It 
can  sometimes  be  safely  merged  in  the  machine  rates  and  even 
as  part  of  the  departmental  or  general  burden. 

Probably  more  has  been  written  on  the  subject  of  the  treat- 
ment of  burden  in  accounts  than  on  any  other  phase  of  account- 
ing, but  with  very  few  exceptions  writers  on  this  subject  have 


98 

labored  under  the  fundamental  misconception  of  cost  accounting 
which  regards  the  province  of  a  cost  system  to  be  absokitely  Hm- 
ited  to  furnishing  the  means  of  distributing  the  expenses  of  a 
business  as  equitably  as  possible  over  its  product.  The  result  has 
been  what  might  have  been  expected — like  travelers  on  the  wrong 
road,  the  more  energetically  they  have  proceeded  along  the  line 
they  have  elected  to  follow  the  farther  away  they  have  strayed 
from  their  true  destination. 

In  view  of  the  fact  that  the  primary  and  often  the  sole  pur- 
pose of  the  usual  elaborate  systems  of  burden  distribution  is 
to  enable  correct  information  to  be  obtained  as  to  the  cost 
of  the  different  products  manufactured  it  is  pertinent  to  inquire 
whether  even  this  limited  demand  is  really  met  by  such  systems. 
The  author  claims  that  wdien  the  system  of  burden  distribution 
does  not  provide  for  distinguishing  between  the  cost  of  produc- 
tion and  the  cost  of  idleness,  which  condition  applies  in  the 
great  majority  of  cases,  however  elaborate  the  refinements  of 
burden  distribution  may  be  the  results  obtained  are  absolutely 
incorrect  and  misleading. 

The  absurdities  of  the  usual  methods  of  burden  distribution 
are  most  evident,  however,  when  the  results  obtained  are  con- 
sidered from  the  standpoint  of  their  value  to  the  operating  man. 
Under  the  wheel-within-wheel  methods  of  burden  distribution 
generally  followed  expenses  are  distributed  and  redistributed 
innumerable  times — the  result  being  that  the  final  figures  pre- 
sented have  no  real  significance  and  only  by  the  most  detailed 
and  elaborate  analysis  can  the  elements  of  which  any  figure  is 
comprised  be  determined.  The  elaborate  systems  of  distribution 
defeat  the  purpose  for  which  they  were  introduced — instead  of 
clarifying  the  situation  the  farther  they  are  carried  to  their 
logical  conclusion  the  more  they  befog  the  issue  so  that  finally 
a  single  figure  on  the  cost  statement  represents  an  inextricable 
conglomeration  of  more  or  less  irrelevant  factors,  and  the  figures 
mean  little  or  nothing  to  anyone  but  the  man  who  compiled  them 
and  even  to  him  have  little  significance  unless  he  first  tears 
down  into  their  component  elements  the  figures  which  he  has 
so  painstakingly  built  up. 

To  take  a  concrete  illustration,  one  of  the  hundreds  of  items 
on  the  cost  sheet  of  a  steel  company  would  be  the  cost  of  locomo- 
tives in  the  open  hearth  and  assuming  that  the  usual  methods 
of  burden  distribution  are  followed  and  that  an  increase  in  this 
item  results  in  a  demand  for  its  analysis,  it  will  be  found  that 
there  are  a  great  number  of  factors  which  may  contribute  to 


99 

the  apparent  increase  shown  which  are  in  no  way  directly  related 
to  tlie  work  of  the  open  hearth  department  or  even  the  actual 
cost  of  operating  the  locomotives,  the  expense  of  which  is  in 
eluded  in  the  charge  on  the  open  hearth  cost  sheet.  Some  of 
the  typical  items  which  would  contribute  to  the  charge  on  the 
open  hearth  cost  sheet  would  be  the  following: 

Proportion  of  expense  of  mechanical  department  office 
Overhead  of  shops  doing  repair  work  on  tracks  and  locomo- 
tives which  overheads  would  include  such  distributed 
factors  as: 

Drinking  water 

Light 

Electric  power 

Mechanical  department  office  expense 

Taxes 

Insurance 

Depreciation 

Now  each   of   the   above  items   would  be   the  result  of   other 
elaborate  distributions  and  redistributions,  as  for  instance; 

Drinking  Water : 

This  in  addition  to  the  direct  charge  for  labor  and  repairs 
to  pumps  and  wells,  pipes,  buildings,  etc.,  would  include 
such  indirect  charges  as  the  cost  of  high-pressure  steam 
(less  low-pressure  steam)  electric  power,  taxes,  deprecia- 
tion, and  shops  overhead.  Taking  one  of  these  sub- 
divisions of  the  cost  of  drinking  water — steam,  for  in- 
stance, and  we  would  find  that  this  also  will  have  been 
afTected  by  a  multitude  of  factors,  of  which  the  following 
are  examples : 

Shops  overhead,  which  of  course  has  also  been 
affected  In-  the  cost  of  the  steam  and  of  hundreds 
of  other  factors 

The  cost  of  locomotives,  which  account  we  are  con- 
sidering 
The  mechanical  maintenance  office,  etc.,  etc. 

Under  such  a  system  a  simple,  direct  expense  such  as  salaries 
paid  to  the  clerks  in  the  mechanical  maintenance  office  would  be 
distributed  and  redistributed  a  thousand  times  a  month  and  it 
would  be  difficult  to  determine  how  much  investigation  would 


be  required  to  enable  an  accurate  statement  to  be  made  of  the 
final  disposition  on  the  cost  sheets  of  this  item. 

Particularly  unfortunate  features  of  a  method  of  cost  dis- 
tribution such  as  has  been  described  above,  which  it  may  be 
incidentally  mentioned  is  entirely  in  accordance  with  the  prin- 
ciples laid  down  in  standard  works  on  cost  accounting,  are  that 
it  hides  the  true  significance  of  really  valuable  information  which 
has  been  compiled,  involves  considerable  expense  to  perform  and 
in  addition  delays  the  preparation  of  reports. 

The  usual  complaint  of  the  cost  accountant  is  that  the 
operating  men  do  not  sufficiently  analyze  the  monthly  statements 
which  are  prepared  for  their  guidance,  but  when  it  is  considered 
that  no  one  other  than  the  cost  accountant  himself  is  in  a 
position  to  determine  exactly  how  any  particular  item  is  made 
up  and  further  that  even  for  him  this  procedure  involves  a  long 
and  tedious  process  of  analysis,  it  is  difficult  to  understand  how 
an  operating  man  could  be  expected  to  make  much  headway 
in  this  direction  even  if  he  had  the  time  available,  which  generally 
very  properly  he  has  not.  Even  more  serious  however  is  the 
fact  that  the  cost  figures  are  not  shown  in  relation  to  standards, 
so  that  the  operating  man  is  compelled  to  compare  the  figures 
for  this  month  with  those  of  previous  months,  but  even  these 
comparisons  are  of  little  value  for  under  such  methods  of  dis- 
tribution as  have  been  described  the  fluctuations  in  any  given 
item  of  cost  may  be  dependent  upon  numerous  factors  having 
little  or  no  relation  to  the  item  being  considered. 

The  interpretation  of  cost  statements  would  often  be  amusing 
if  it  were  not  so  tragic,  and  in  this  connection  the  author  calls  to 
mind  one  case  where  a  corporation  with  a  large  plant  producing  a 
main  product  with  many  by-products  employed  a  firm  of  profes- 
sional accountants  to  install  a  system  of  cost  accounting  involving 
the  elaborate  wheel-within-wheel  methods  of  burden  distribution 
such  as  have  been  described,  and  under  which  it  is  necessary 
to  distribute  some  of  the  burden  of  the  machine  shop  to  the 
tool  room  and  vice  versa,  and  where  the  expenses  of  cleaning 
the  office  are  carefully  distributed  to  the  operating  departments, 
etc.  The  final  result  of  these  efforts  was  a  series  of  cost  sheets 
with  thousands  of  items,  each  of  which  was  reduced  to  varying 
unit  costs  taken  to  four  places  of  decimals  for  this  month,  last 
month,  this  year  to  date  and  last  year  to  date.  To  achieve  this 
demanded  the  entire  time  and  efforts  of  an  experienced  chief 
clerk  and  a  considerable  force  of  machine  calculators  and  plant 
data  gatherers,  and  the  completed  volume  was  seldom  presented 


■^NDAvRD 


MKCHINE     EKRNINeS 

Month    of     


DA^T^v 


ST^NOKRD      MACHINE     EARMINGS 


6(>>RN1NS5  . 


^^^f'' 


^ 


lOI 


to  the  officials  of  the  company  until  well  into  the  course  of 
the  next  month  and  then  was  presented  in  person  l)y  the  chief 
clerk  who  remained  in  the  capacity  of  interpreter.  He  was 
quite  resourceful  at  this  and  could  explain,  for  example,  to  the 
perplexed  official  that  the  increase  in  the  cost  of  operating  the 
locomotive  crane  last  month  included  an  increase  in  the  wages 
of  the  coal-handling  gang,  overtime  in  the  machine  shop,  mis- 
haps to  the  auto  truck,  severe  breakage  in  the  laboratory  and 
an  increase  in  the  clerical  force  of  the  shop  offices.  The  example 
given  is  exaggerated  little  if  any  and  illustrates  the  danger  of 
carrying  refinements  of  burden  distribution  to  a  point  where  the 
results  obtained  become  ridiculous. 

In  many  cases,  of  course,  in  order  to  obtain  correct  cost 
information  it  is  necessary  to  introduce  very  considerable  refine- 
ments of  burden  distribution  particularly  in  cases  where  the 
product  is  of  a  varied  character  and  the  work  performed  on 
a  variety  of  machines.  An  illustration  of  the  grossly  inaccurate 
results  sometimes  obtained  under  the  plan  of  distributing  burden 
on  a  departmental  basis  was  given  in  a  previous  chapter  in 
which  it  was  shown  that  under  this  method  of  distribution  one 
class  of  work  would  be  charged  with  ten  and  a  half  times  as 
much  burden  as  it  should  properly  bear.  In  such  cases,  accurate 
costs  can  only  be  obtained  by  the  use  of  machine  rates  and 
in  Figure  8  are  illustrated  the  underlying  principles  involved  in 
such  a  plan  of  distribution. 


The  Underlying  Principles  of  Machine  Rates 

A  section  of  this  diagram  is  devoted  to  illustrating  the  method 
of  building  up  machine  rates,  and  in  the  example  given  it  is 
assumed  that  the  rates  taken  are  made  up  on  the  basis  of  past 
results,  though  obviously  where  an  organization  has  developed 
to  a  point  where  standards  of  possible  attainment  can  be  figured 
in  place  of  past  performances  such  standards  would  be  used. 
The  method  of  building  up  the  machine  rates,  however,  would 
be  similar  to  that  shown. 

Reference  to  the  diagram  will  show  that  in  the  simple  case 
taken  as  an  example  a  machine  rate  comprises  the  following: 

1  A  standard  rate  per  hour  for  machine  repairs  and  main- 

tenance 

2  A  standard  rate  per  hour  for  power 


I02 


3  A  standard  rate  per  hour  for  departmental  burden  (over 

and  above  machine  maintenance  and  power) 

4  A  standard  rate  per  hour  for  general  factory  expenses 

The  first  two  of  these  factors  are  common  to  the  machines 
in  a  machine  group  (by  which  term  is  meant  all  machines  in 
a  department  of  identical  character).  The  third  is  common 
to  all  machines  in  a  department,  and  the  last  is  common  to  all 
machines  in  the  plant. 

The  portion  of  the  machine  rate  for  machine  repairs  and 
maintenance  represents  the  cost  per  hour  of  maintaining  the 
machines  during  the  period  taken  as  a  basis.  For  instance, 
taking  the  second  group  of  machines  in  Department  A  as  an 
example,  the  machine  hours  in  the  period  totalled  to  4000  and 
involved  an  upkeep  expense  of  $600,  representing  a  rate  per 
machine  hour  of  $0.15,  which  figure  is  accordingly  incorporated 
in  the  machine  rate  for  that  group  of  machines. 

The  units  of  power  produced  during  the  period  taken  as  a 
basis  totalled  to  300,000,  the  cost  of  producing  these  being 
$30,000  or  a  cost  per  unit  of  $0.10.  It  is  assumed  that  the 
consumption  of  power  by  the  machines  in  group  2  of  Depart- 
ment A  is  four  units  per  hour,  so  that  $0.40  is  added  to  the 
machine  rate  in  respect  to  this  expense. 

The  burden  (over  and  above  productive  labor,  machine  main- 
tenance and  powder)  of  Department  A  in  the  period  taken  as 
a  basis  totalled  to  $5000,  and  the  total  of  the  machine  hours 
in  the  department  in  this  period  was  20,000,  representing  a 
cost  per  machine  hour  of  $0.25,  this  amount  also  being  added 
to  the  machine  rate. 

General  factory  expenses,  which  are  distributed  over  all  the 
machines  in  the  plant,  totalled  to  $38,000,  the  total  of  the 
machine  hours  for  the  whole  plant  in  the  period  being  200,000, 
or  a  cost  per  machine  hour  of  $0.19. 

The  machine  rate  for  group  2  in  Department  A  totals  there- 
fore to  $0.99,  made  up  as  follows: 

Machine  repairs  and  maintenance $0.15 

Power 0.40 

Department  A,  departmental  burden 0.25 

General   factory  expenses 0.19 

Total 0.99 


I03 

In  the  standard  cost  sheet  (Form  A)  is  ilkistrated  the  method 
of  using  the  machine  rate  in  the  compilation  of  a  cost.  In  the 
operation  shown  as  an  example  the  standard  time  on  a  machine 
group  per  hundred  pieces  is  taken  as  lo  hours,  the  machine  cost 
being  figured  at  lo  times  the  machine  rate  of  $0.99  or  $9.90 
per  hundred  pieces. 

The  balance  of  the  diagram  illustrates  the  use  of  machine 
rates  in  connection  with  the  compilation  of  efficiency  data,  this, 
as  also  the  labor  efficiency  data  illustrated,  being  obtained 
through  the  medium  of  punched  cards  and  machine  equipment 
for  sorting  and  tabulating. 

This  use  of  punched  cards  for  statistical  purposes  is  probably 
well  known  to  most  of  the  readers  of  this  volume,  the  method 
first  being  used  in  connection  with  the  compilation  of  the  census 
in  Washington,  and  now  very  largely  in  industrial  accounting. 
The  principle  involved  is  very  simple,  information  being 
recorded  on  cards  by  punching  holes  in  the  manner  illustrated  in 
Form  B  on  the  diagram,  information  being  obtained  from  the 
cards  by  the  use  of  two  machines,  a  sorting  machine  and  a 
tabulating  machine.  The  function  of  the  sorting  machine,  as 
its  name  indicates,  is  to  sort  the  cards  in  any  arrangement 
desired.  For  instance,  taking  the  card  shown  in  Form  B  as 
an  illustration  and  assuming  that  it  is  desired  to  arrange  the 
cards  by  departments,  the  machine  would  be  adjusted  to  sort 
the  column  headed  c  and  the  cards  run  through  the  sorter  which 
would  automatically  (either  mechanically  or  electrically,  depend- 
ing upon  the  system  of  machines  employed)  sort  them  by  depart- 
ments. The  tabulating  machine,  as  its  name  also  suggests,  is 
used  in  obtaining  totals  from  the  cards  and  is,  in  reaUty,  an 
adding  machine,  the  cards  being  run  through  the  machine  which 
registers  the  totals  of  the  columns  which  it  is  desired  to  tabulate. 
For  instance,  continuing  the  illustration  just  given,  after  the 
cards  were  sorted  by  departments,  by  placing  these  cards  in  the 
tabulator  the  machine  would  automatically  provide  the  totals 
of  the  following  columns:  actual  hours  worked;  standard  hours; 
standard  machine  earnings;  standard  labor;  actual  labor;  actual 
hours  at  standard  rate. 

The  outstanding  advantage  of  the  punched  card  method  of 
compiling  information  is  its  extreme  flexibility,  for  whereas  in 
the  case  of  compilation  of  written  data  any  rearrangement  of 
the  information  requires  an  entirely  new  written  tabulation,  by 
the  use  of  punched  cards  any  desired  combination  of  information 
can  be  obtained  merely  bv  resorting  and  retabulating  the  cards. 


I04 

The  use  of  the  punched  card  (Form  B)  In  obtaining  data 
relative  to  labor  efficiencies  is  illustrated  in  Form  C  (analysis 
of  standard  labor  earnings)  this  form  showing  the  following 
for  each  group  of  machines: 

1  Standard  labor  earned 

2  Actual  labor 

3  Net  increase  or  decrease 

4  Actual  hours  figured  at  standard  rate 

5  Actual  hours  figured  at  actual  rate  (same  as  2  duplicated 

on  form  in  order  to  facilitate  calculation  of  items  in 
column  6,  which  represent  difference  between  columns 
4  and  5  as  explained  later) 

6  Increase  or  decrease  due  to  rate  fluctuations 

7  Increase  due  to  variations  in  efficiency 

The  method  of  obtaining  the  information  required  in  this 
form  would  be  as  follows : 

1  Sort     operation     cards     (Form     B)     by     departments 

(column  c) 

2  Sort  operation  cards  by  machine   groups    (Column   D) 

3  Tabulate  cards  for  each  group  as  shown  in  Table  13 

Table  13.     Standard  Labor  Earnings 


Labor  Earnings 


Column  on 
Operation 

Card 
(Form  B) 


Column  on 

Analysis  of 

Standard 

Labor  Earnings 

(Form  C) 


Standard  labor  earned 

Actual  labor 

Actual  hours  figured  at  standard  rate 


On  Form  C  obviously  the  difference  between  the  standard 
labor  earned  (column  i)  and  the  actual  labor  (column  2)  is 
the  increase  or  decrease  comparing  actual  with  standard,  and 
represents  the  index  of  the  efficiency  of  labor  as  a  whole,  this 
difference  being  entered  in  column  3,  increases  being  entered 


I05 

in  red  and  decreases  in  black,  as  indicated  on  tlie  illustration. 
The  difference  between  the  actual  hours  figured  at  the  standard 
rate  (column  4)  and  the  actual  hours  at  the  actual  rate  (column 
5)  represents  the  increases  or  decreases  owing  to  changes  from 
the  standard  rates,  these  dift'erences  being  entered  in  column  6. 
The  balance  of  the  net  increases  or  decreases  that  is  the  difference 
between  columns  3  and  6,  represents  the  increases  or  decreases 
resulting  from  variations  in  efficiency  these  differences  being 
entered  in  the  column  so  headed  (column  7). 

The  operation  card  (Form  B)  also  forms  the  medium  through 
which  the  information  required  on  the  analysis  of  standard 
machine  earnings  (Form  D)  is  obtained,  the  cards  still  arranged 
by  machine  groups  being  tabulated  as  shown  by  Table  14 : 

Table  14.     Standard  Machine  Earnings 


Machine  Earnings 

Columns  on 
Operation 

Cards 
(Form  B) 

Columns  on 
Analysis  of 
Standard 
Machine 
Earnings 
(Form  D) 

Actual  hours  worked 

Standard  hours  earned 

F 
G 
H 

2 

4 

8 

Total  standard  machine  earnings 

The  employment  efficiency  percentages  in  column  3  are 
obtained  by  dividing  the  standard  working  hours  in  period 
(column  i)  by  the  actual  hours  worked  (column  2).  The 
operating  efficiency  percentages  (column  5)  are  obtained  by 
dividing  the  actual  hours  involved  (column  2)  into  the  standard 
hours  earned  (column  4)  and  the  end  efficiency  (column  6) 
by  dividing  the  standard  hours  earned  (column  4)  by  the 
standard  working  hours  in  period  (column  i). 

The  analysis  of  the  total  standard  machine  earnings  (column 
8)  into  standard  repairs  and  maintenance  of  machines,  power, 
departmental  burden,  and  general  factory  expenses  (columns 
10,  12,  14,  and  16)  is  obtained  by  using  the  components  of 
the  machine  rates  given  in  the  section  of  the  diagram  illustrating 
the  method  of  building  up  the  machine  rates;  for  example,  tak- 
ing the  case  of  machine  group  2  already  referred  to,  the  distribu- 


io6 


tion  of  the  total  standard  machine  earnings  of  $370.26  is  made 
up  as  shown  in  Table  15: 


Table  15.     Distribution  of  Total  Standard  Machine  Earnings 


Item 

Standard  Machine  Rates 

Per  Hour 

Total 

Repairs  and  maintenance 

$0.15 
0.40 
0.25 
0. 19 

$0.99 

$  56.10 
14Q.60 

Power 

Departmental  burden 

93  50 
71.06 

$370.26 

General  factory  expense 

Total 

The  information  obtained  relative  to  standard  machine  repairs 
and  maintenance,  power,  and  departmental  burden  is  carried  to 
the  departmental  efficiency  statement  (Form  G),  where  the  total 
expenses  are  also  shown,  the  latter  being  obtained  from  the 
distribution  of  store  requisitions  and  indirect  labor  cards,  as 
indicated  on  the  diagram.  The  analysis  of  standard  depart- 
mental miscellaneous  expense  and  general  factory  expense  is 
made  in  a  similar  manner  to  the  analysis  of  machine  repairs 
and  maintenance  and  power,  detailed  data  relative  to  this  being 
shown  in  Forms  E  and  F. 

Information  relative  to  efficiencies  is  brought  to  a  focus  in 
the  summarized  manufacturing  cost  and  efficiency  statement 
(Form  H)  this  showing  a  comparison  between  the  actual  and 
standard  costs  of  material,  labor  and  burden  of  the  whole  plant. 
No  details  are  shown  in  the  diagram  of  the  method  employed 
for  obtaining  comparison  between  actual  and  standard  material 
costs,  this  matter  having  been  dealt  with  somewhat  completely 
in  the   foregoing  chapters. 

There  is  nothing  new  in  the  use  of  machine  rates  as  a 
medium  of  burden  distribution  but  it  is  a  somewhat 
remarkable  fact  that  apparently  the  leading  exponents  of 
their  use  have  not  realized  that  in  machine  rates  they  have 
in  their  grasp  the  means  of  bringing  cost  accounting  into  line 
with  modern  industrial  thought  as  expressed  in  scientific  man- 


I07 

agement  methods.  So  completely  has  the  accoiintin.c;'  mind  been 
obsessed  by  the  idea  that  the  sole  object  tjf  cost  accountin^^  is 
to  distribute  expenses  in  such  a  manner  as  to  ol)tain  correct 
information  as  to  the  costs  of  manufacture  that  the  fact  that 
in  machine  rates  we  have  the  ideal  vehicle  for  furnishing 
operating  efficiency  data  does  not  seem  to  have  been  realized. 
A  machine  rate  is  a  standard  cost  and  a  comparison  of  the 
machine  earnings  and  the  cost  of  operating  the  machines  as 
illustrated  in  Figure  8  provides  the  simplest  and  most  effective 
means  of  furnishing  efficiency  data.  The  advantage  gained 
from  the  use  of  machine  rates  as  a  medium  of  expense  distribu- 
tion though  important  is  not  to  be  compared  with  that  resulting 
from  their  use  as  a  means  of  comparing  the  actual  expense  w'ith 
standard. 


Combining  Standard  Labor  With   Machine  Rate 

In  the  illustration  given  in  Figure  8  the  standard  labor  cost 
is  figured  independently  of  the  machine  cost  but  the  ideal  plan 
to  follow  when  machine  rates  are  used  is  to  combine  the  standard 
labor  with  the  machine  rate.  Once  the  machine  rate  is  figured 
the  work  of  compiling  standard  labor  and  burden  costs  is  con- 
fined to  determining  the  machines  on  which  the  various  opera- 
tions are  performed  and  the  standard  production  per  hour  for 
such  work  on  the  different  machines.  Assume,  for  instance, 
that  the  standard  labor  and  machine  rate  per  hour  on  a  certain 
class  of  bolt  header  is  $i.6o  (labor  $0.60,  machine  rate  $1.00) 
and  the  standard  production  per  hour  for  different  classes  of 
work  on  this  machine  to  be  as  follows: 

Countersunk   machine   bolts — ^^2    inch   diameter — 2000  per 

hour 
Plow  bolts — 7/16  inch  diameter — 2500  per  hour 

then  the  standard  labor  and  liurden  cost  per  1,000  of  heading 
the  two  classes  of  product  shown  would  be: 

^T    1  •      ,1      1. 60X1000         _ 

Machme  bolts =0.80 

2000 

„        ,    ,       1. 60X1000  , 

Plow  bolts —=0.64 

2500 


io8 


In  order  to  determine  the  machine  earnings  all  that  is  neces- 
sary would  be  to  figure  the  production  at  the  rates  shown  by 
Table  i6: 

Table  i6.    Total  Machine  Earnings 


Class  of  Product 

Production 

Rate  per  i  ,000 

Total  Machine 
Earnings 

Machine  bolts 

50,000 
75,000 

$0.80 
0.64 

$40 . 00 
48.00 

Plow  bolts 

Total 

$88.00 

Assuming  that  the  machine  rate  of  $1.00  per  hour  was  made 
up  as  follows: 

Power    $0.20 

Tools    0.30 

Repairs  0.15 

Departmental  burden    0.20 

General    burden    0.15 

$1.00 

.The  distribution  of  the  machine  earnings  would  be  made  as 
shown  in  Table  17: 


Table  17.     Distribution  of  Machine  Earnings 


Item 

Standard  Rate 

per 

Hour 

Per  Cent  of 

Total  Machine 

Rate 

Proportion  of 
Machine 
Earnings 

Producing  labor 

$0.60 
0.20 
0.30 

0-15 
0.20 

0.15 

37-5 
12.5 
18.75 

9-375 
12-5 

9-375 

$3^.00 

Power 

Tools 

Repairs 

Departmental  burden 

General  burden 

II  .00 

16.50 

8.25 

II  .00 

8.25 

Total 

$1.60 

100.00 

$88.00 

lop 

Combining  this  information  with  the  actual  expense  of 
operating  the  machine  and  a  profit  and  loss  statement  is  obtained 
for  the  machine   as   shown  by  Table    i8   which   has   real   sig- 


Table  1 8.     Machine  Profit  or  Loss 


Item 

Machine 
Earnings 

Cost 

Profit 

Loss 

Producing  labor 

Power 

$33 • oo 
II  .00 
16.50 

8.25 
II  .00 

8.25 

$35  00 
10.00 
15.00 
12.00 
12.00 
7.00 

$1   00 
1.50 

1-25 

$2.00 

Tools 

Repairs 

3-75 
1 .00 

Departmental  burden .  . 
General  burden 

Total 

$88.00 

$91 .00 

$3-75 

$6.75 

Net  loss 

$3  00 

nificance  for  the  operating  man.  If  the  cost  accountant  can  fur- 
nish the  operating  department  with  statements  like  this  which 
do  not  demand  laborious  analysis  and  comparisons  with  previous 
months  but  show  where  costs  have  exceeded  standard  he  will  not 
have  to  complain  that  the  operating  men  do  not  take  sufficient 
interest  in  the  figures  which  are  submitted  to  them.  In  addition 
to  showing  the  extent  of  variations  from  standard  the  plan  should 
be  expanded  to  show  the  "cause"  of  these  variations,  but  this 
feature  of  the  methods  developed  by  the  author  is  reserved  for  a 
later  chapter. 


Chapter  V 

COOPERATION    AND    COORDINATION 

THE  predominant  characteristics  of  the  American  people  are 
extreme  individuaHty,  openness  to  new  ideas,  impulsive- 
ness, energy,  restlessness,  and  ambition.  When  the  magnificent 
story  of  the  material  concjuest  of  this  land  of  opportunity  is 
reviewed,  the  possession  of  these  traits  seems  not  only  fitting 
but  inevitable,  for  both  ancestry  and  environment  have  joined 
in  making  the  American  of  to-day  what  he  is. 

The  inhabitants  of  the  United  States  are  the  descendants  of 
the  most  progressive  and  adventurous  of  the  Europeans,  of  the 
Spanish,  French,  Dutch,  British,  Italians,  Germans,  Scandina- 
vians, and  Russians,  who,  breaking  away  from  their  own  en- 
vironment, embarked  upon  an  adventurous  journey  to  the  land 
of  promise. 

None  but  the  competent,  the  strong  and  the  self-reliant  could 
survive  the  hardships  undergone  by  the  early  settlers ;  in  the 
first  terrible  winter  which  the  Pilgrims  suffered  nearly  one-half 
of  the  entire  number  was  cut  off.  As  William  Bradford,  after- 
ward Governor  of  New  England  writes : 

But  it  pleased  God  to  visit  us  then,  with  death  dayh',  and  with  so 
general  a  disease  that  the  living  were  scarce  able  to  burie  the  dead,  and 
the  well  not  in  any  measure  sufficient  to  tend  the   sick. 

In  1607  George  Percy,  speaking  of  the  colonists  in  Virginia 
writes  that. 

Burning  fevers  destroyed  them,  some  departed  suddenly,  but  for  the 
most  part  they  died  of  mere  famine.  .  .  .  Sufferers  were  groaning  in  every 
corner  of  the  fort,  most  pitiful  to  hear,  and  if  there  were  any  conscience 
in  men  it  would  make  their  hearts  to  bleed  to  hear  the  pitiful  murmurings 
and  outcrys  .  .  .  some  departing  out  of  the  world  sometimes  three  and 
four  in  a  night ;  in  the  morning  their  bodies  trailed  out  of  the  cabins 
like  dogs  to  be  buried. 

The  hardships  suffered  by  the  early  settlers — famine,  fever, 
and  the  fierce,  unrelenting  struggle  with  land  and   forest  and 


Ill 


the  Indicin  foe,  the  tremendous  tasks  involved  in  the  develop- 
ment in  three  centuries  of  a  country  not  far  short  in  point  of 
area  of  the  whole  of  Europe,  have  developed  a  race  of  people 
untrammelled  by  tradition,  fearless,  and  tireless  in  endeavor  and 
self-reliant  in  the  extreme. 

In  the  business  world  of  to-day,  we  find  in  a  marked  degree 
the  strong  individualism  which  the  American  inherits  from  his 
hardv  and  self-reliant  forefathers.  It  is  a  magnificent  in- 
heritance, this  trait,  and  one  which  has  made  the  American 
race  leaders  in  the  fields  of  invention  and  of  business,  but  like 
all  other  human  attributes  there  is  a  point  where  excess  of  devel- 
opment is  a  detriment  rather  than  an  advantage,  and  this  applies 
particularly  as  regards  individualism  in  the  modern  business 
organization  where  a  large  number  of  persons  require  to  work 
together  for  a  common  end  and  for  the  common  good,  and  where 
unless  the  interests  of  the  individual  are  subordinated  to  those 
of  the  business  organization  as  a  whole  there  will  be  working 
at  cross-purposes  and  consecjuent  friction  and  waste. 

Efficiency  in  the  operation  of  a  business  is  largely  dependent 
upon  two  factors :  cooperation,  or  the  working  together  of  the 
organization  towards  a  common  end ;  in  other  words  team  work, 
and  coordination,  or  the  arrangement  of  methods  and  instru- 
ments of  production  and  distribution  in  such  a  manner  that  the 
business  machine  forms  a  harmonious  whole,  operating 
smoothly,  continuously  and  effectively.  American  business  how- 
ever does  not  yet  fully  appreciate  the  importance  of  either 
cooperation  or  coordination,  and  the  evidences  of  this  are  every- 
where apparent.  There  is  often  too  much  of  a  tendency  on 
the  part  of  department  heads  to  surround  their  departments  with 
an  imaginary  line,  outside  of  which  they  have  little  interest,  and 
within  which  they  resent  intrusion. 

In  an  earlier  chapter  the  author  mentioned  an  instance 
where  the  heads  of  the  general  accounting  and  cost  accounting 
departments  were  so  jealous  of  their  authority  that  they  issued 
separate  cards  of  account,  this  procedure  rendering  it  necessary 
for  two  entirely  distinct  expense  and  payroll  distributions  to 
be  made — one  for  the  general  books  and  one  for  the  cost  records. 
Similar  instances  mav  be  recited,  and  the  reader  can  doubtless 
think  of  many  more.  Tremendous  sums  of  money  are  lost 
owing  to  a  lack  of  cooperation  and  coordination  between  the 
sales  and  distribution  divisions  of  business.  Some  years  ago, 
a  certain  automobile  device  was  advertised  extensively,  and  most 
expensively,  but  little  provision  was  made  to  meet  the  demand 


resulting  from  the  advertising  campaign,  so  that  the  money  spent 
was  in  large  measure  wasted. 


An  Example  of  Cross  Purposes 

A  leading  publishing  house  some  time  ago  in  a  full  page 
advertisement  in  a  magazine  having  a  circulation  among  the 
particularly  well-to-do  offered  an  expensive  set  of  books  to  be 
sent  on  approval  to  readers  of  that  magazine.  A  friend  of  the 
author,  a  man  of  considerable  means  and  extensive  credit,  wrote 
for  these  books  to  be  sent  him  on  approval.  Some  time  after- 
ward he  received  a  printed  postal  card  acknowledgment  stating 
that  the  books  would  shortly  be  shipped.  About  three  weeks 
later  the  books  had  not  arrived  and  as  he  wished  to  give 
these  to  a  member  of  his  family  as  a  birthday  present,  and  as 
there  was  very  little  time  left,  he  telegraphed  at  his  own  expense 
asking  when  the  books  would  be  shipped,  stating  that  he  wished 
to  make  a  present  of  them  and  would  appreciate  prompt  action. 
Several  days  afterward  this  concern  wrote  him  advising  that 
if  he  would  furnish  references  they  would  be  pleased  to  ship 
the  books.  When  he  wrote  reviewing  the  history  of  the  transac- 
tion and  criticising  the  manner  in  which  the  affair  had  been 
conducted,  particularly  stating  that  he  would  have  been  glad 
to  have  furnished  references  had  the  necessity  for  this  been  men- 
tioned in  the  advertisement  or  in  the  acknowledgment  of  his 
original  request,  his  letter  was  never  answered.  Here  is  a  case 
where  the  efforts  and  money  expended  by  the  advertising  depart- 
ment were  worse  than  wasted,  owing  to  the  incompetence  and 
stupidity  of  other  departments  of  the  business. 

In  many  manufacturing  concerns  the  salesman  makes  the 
promises,  having  full  authority  to  do  so,  but  being  without 
information  relative  to  conditions  in  the  factory,  he  leaves  to 
the  operating  division  the  duty  of  explaining  to  the  customer 
why  the  promises  are  not  kept. 

The  relation  between  the  average  selling  and  operating  or- 
ganizations is  one  somewhat  approximating  a  state  of  armed 
neutrality.  Not  being  fully  acquainted  with  one  another's  prob- 
lems the  members  of  one  division  are  apt  to  attribute  all  troubles 
experienced  to  the  deficiencies  of  the  other.  A  particular  source 
of  irritation  is  the  tendency  of  salesmen  to  accept  orders  for 
special  product,  when  by  the  exercise  of  a  little  salesmanship 
it   would  be   possible  to   supply   the   customer's   wants   with   a 


113 


standard  article  and  by  this  means  save  t/oiible  for  the  operating 
division  and  expense  to  the  customer. 


Cooperation  and  the  Average  Office 

The  average  office  offers  an  excellent  illustraticjn  of  lack  of 
cooperation.  When  the  limited  amount  of  assistance  they 
offer  one  another  is  considered,  one  might  imagine  that  the  em- 
ployees in  adjoining  departments  were  v\^orking  for  competing 
concerns  instead  of  for  the  same  institution.  In  all  departments 
there  are  certain  times  when  there  is  a  peak  load  of  work,  in 
the  payioll  department,  for  instance,  at  the  end  of  the  week  and 
in  the  accounting  department  at  the  beginning  of  the  month, 
and  there  are  also  times  when  the  work  ahead  is  naturally  very 
unequally  distributed,  for  instance,  when  orders  are  few  but  ship- 
ments many,  with  resultant  slackness  in  the  order  department 
and  pressure  in  the  billing  and  accounting  departments.  In 
many  businesses,  however,  no  attempt  or  very  little  is  made 
to  relieve  pressure  at  one  point  by  transfer  of  clerical  help  from 
a  department  where  the  work  at  the  time  is  light.  The  argument 
that  the  employees  in  one  department  do  not  know  the  work 
of  another  department  is  simply  evidence  of  a  lack  of  training 
and  planning,  for  the  greater  part  of  the  work  of  all  office 
departments  is  routine  of  such  a  character  that  if  clear  in- 
structions were  available  any  intelligent  clerk  could  handle 
it  with  moderate  supervision. 

The  author  happens  to  be  well  acciuainted  with  the  methods 
of  one  large  office  in  the  middle  west  where  several  hundred 
clerks  are  employed  and  this  concern  has  been  able  to  very  greatly 
reduce  its  clerical  expenses  by  a  centralization  or  coordination 
of  the  control  of  its  office  force,  so  that  temporary  pressure  on 
one  department  can  be  equalized  by  transferring  help  from 
another  department. 

Such  a  plan  of  handling  work  affords  a  further  advantage 
in  furnishing  greater  possibilities  for  the  advancement  and 
development  of  members  of  the  office  organization.  One  of 
the  most  difficult  problems  confronting  the  manager  of  a  large 
office  is  to  find  some  way  of  enabling  ambitious  and  capable 
subordinates  to  increase  the  value  of  their  services  both  to  their 
employers  and  themselves.  In  many  cases  there  is  no  oppor- 
tunity for  advancement  in  the  near  future — the  w(^rk  (if  the 
immediate  superior  is  satisfactory  and  other  channels  of  promo- 


114 

tion  are  not  available.  By  coordinating  the  work  of  the  office 
employees,  however,  the  versatile  and  capable  employee  can 
become  very  valuable  and  his  capabilities  along  the  lines  of  being 
able  to  handle  a  number  of  different  jobs  coupled  with  an  elastic 
plan,  so  that  advantage  can  be  taken  of  this  versatility,  render 
it  possible  to  pay  larger  salaries  to  the  exceptional  man  than 
would  otherwise  be  the  case.  In  addition,  the  broader 
acquaintance  which  the  employee  obtains  of  the  business 
generally  enables  him  to  handle  the  problems  which  he  meets 
in  his  daily  work  more  intelligently  and  with  greater  interest. 


The  Importance  of  Coordination  in  Accounting 

The  importance  of  coordination  between  the  cost  and  general 
accounting  systems  has  always  been  realized  by  professional 
accountants,  but  it  is  by  no  means  unusual  to  find  cost  systems 
operated  entirely  independently  of  the  general  books  and  not 
controlled  in  any  way  by  the  latter,  and  the  author  calls  to 
mind  one  instance  when  the  dangers  attending  such  a  condition 
were  somewhat  vividly  exemplified.  In  this  case  it  was  the 
custom  to  prepare  a  monthly  statement  of  profit  and  loss.  This 
statement  was  made  up  in  two  sections,  it  being  the  duty  of 
the  general  accountant  to  set  a  valuation  on  the  production  of 
the  factory  for  the  month  and  of  the  cost  accountant  to  make 
up  a  statement  showing  the  cost  of  this  production.  These  two 
sections  of  the  statement  were  made  up  entirely  independently, 
the  excess  of  the  value  of  the  product  over  the  cost  of  produc- 
tion representing  the  estimated  profit  for  the  month. 

The  operations  of  the  business  in  question  involved  the 
production  of  an  important  by-product,  the  value  of  which  repre- 
sented a  considerable  proportion  of  the  company's  income  and 
this  by-product  was  treated  by  the  cost  accountant  as  a  reduction 
of  the  cost  of  production  and  added  by  the  general  accountant 
to  his  valuation  of  the  product,  with  the  result  that  the  profits 
as  shown  by  the  statement  were  inflated  to  the  extent  of  this 
by-product,  this  being  taken  into  account  twice. 

Very  serious  troubles  have  been  caused  by  lack  of  coordina- 
tion in  accounting  systems.  The  author  knows  of  one  case 
where  an  important  company  went  into  a  receiver's  hands,  even 
though  it  was  essentially  in  a  sound  condition,  owing  to  having 
greatly  overestimated  its  profits  and  declared  a  dividend  which 
in  fact  had  not  been  earned ;  in  another  case  an  important  com.- 


115 

pany   made    a    similar    error    which    might    also    have    resulted 
disastrously. 

The  accounting  system  of  a  large  concern  manufacturing  a 
varied  and  extensive  product  is  necessarily  complex,  and  unless 
the  multitudinous  records  required  are  properly  controlled  and 
coordinated  the  most  dangerous  misinformation  may  be  given 
out. 


The  Trend  Toward  CoorERATiox  axd  Coordixation 

We  are  entering  an  era  of  cooperation  and  coordination, 
not  only  as  regards  the  internal  economy  of  the  individual 
business  but  also  as  regards  the  relations  between  competitors 
in  the  same  line  and  industry  in  general.  This  spirit  is  evidenced 
by  the  efforts  which  are  being  made  in  the  different  industries 
to  establish  uniform  methods  of  accounting  which  will  better 
conditions  in  the  trade  generally  by  eliminating  indiscriminate 
price  cutting,  owing  to  a  lack  of  knowledge  as  to  costs  of  manu- 
facture and  distribution,  and  by  encouraging  the  adoption  of 
better  business  methods.  It  is  beginning  to  be  realized  that  busi- 
ness failures  result  not  only  in  loss  to  the  individual  manu- 
facturer, his  employees,  stockholders  and  creditors,  but  to  his 
competitors  in  the  loss  of  prestige  sustained  by  the  industry, 
and  to  the  community  in  general,  for  in  the  long  run  it  is  the 
ultimate  consumer  who  pays  for  everything.  It  is  an  under- 
standing of  this  fact  that  prompted  the  Associated  Advertising 
Clubs  of  the  \\Vjrld  to  institute  the  valuable  work  undertaken 
by  this  organization  in  educating  the  retailer  to  keep  proper 
records  and  adopt  better  methods  of  management. 

Not  onlv  is  there  an  increasing  tendency  toward  cooperation 
between  manufacturers  in  the  same  line,  and  between  business 
men  in  general,  but  w^e  may  also  look  forward  to  an  increasing 
degree  of  cooperation  between  the  business  interests  of  the 
country  and  the  Government.  The  sound  common  sense  of  the 
people  of  this  country  will  undoubtedly  rebel  against  the  exten- 
sion of  the  paternalistic  attitude  so  dear  to  a  certain  type  of 
statesman  and  expressed  in  a  desire  to  super\-ise,  direct,  and 
govern  all  of  the  activities  of  industry. 

Public  service  corporations  are  beginning  to  realize  that  in  the 
long  run  the  wa^■  to  profits  lies  al(mg  the  line  of  cooperation 
with  the  consumer.  The  old  ''public  be  damned"  policy  is  fast 
losing  its  adherents  and  though  it  is  too  much  to  hope  that  this 


ii6 

change  of  viewpoint  has  been  entirely  due  to  a  change  of  heart,  in 
recent  years  the  majority  of  pubhc  service  corporations  have 
shown  an  almost  pathetic  desire  to  earn  the  good  will  of  their 
customers. 

The  Balancing  of  Industrial  Initiative  and  Organiza- 
tion Needs 

One  of  the  important  problems  in  business  is  to  determine 
the  policy  to  be  followed  in  order  to  encourage  the  exercise  of 
individual  initiative,  and  at  the  same  time  subordinate  the 
individual  to  the  interests  of  the  organization  and  the  business 
as  a  whole.  In  modern  business,  with  the  necessity  which  exists 
for  the  employment  of  specialists  of  many  kinds,  the  mainte- 
nance of  such  a  balance  is  an  undertaking  calling  for  skill  and 
judgment.  By  the  introduction,  however,  of  properly  designed 
routine  methods  the  problem  is  greatly  simplified,  the  work  of 
all  individuals  being  coordinated  and  part  of  a  harmonious 
whole. 

Even  professional  organizers  often  fall  far  short  of  fully 
applying  this  principle  in  management.  This  is  particularly  the 
case  as  regards  the  methods  introduced  in  the  planning  and  cost 
departments,  in  many  cases  the  work  of  the  former  being  entirely 
disconnected  from  that  of  the  latter.  Even  in  those  cases  where 
the  methods  of  the  planning  department  are  founded  upon  the 
use  of  standards  of  time  and  production,  the  cost  department 
will  be  operated  along  the  lines  of  detailed  cost  accounting 
absolutely  divorced  and  independent  of  the  standards  used  by 
the  planning  department.  Such  a  situation  is  obviously  an  ab- 
surdity. If  the  work  of  the  shop  can  be  predetermined  and 
laid  out  according  to  standards  of  time  and  material,  obviously 
the  same  standards  can  be  employed  in  the  cost  department, 
the  records  of  which  will  then  reflect  results  in  terms  which 
are  also  common  to  those  employed  in  the  planning  department. 
The  author,  however,  cannot  recall  having  seen  any  book  or 
article  on  scientific  management  or  accounting  where  a  really 
complete  coordinated  planning  and  cost  system  is  described. 

As  was  previously  stated,  it  is  the  province  of  the  engineering 
department  to  determine  standards  and  to  provide  the  means  of 
accomplishing  them,  while  it  is  the  function  of  the  accounting 
department  to  furnish  records  showing  the  extent  to  which  the 
standards  are  being  realized  and  where  the  efforts  of  the  en- 
gineering department  have  been  successful  and  where  not. 


117 


The  Advantages  of  Coordinating  Methods 

The  advantages  of  coordination  in  methods  are  many. 
Primarily,  under  such  an  arrangerient  the  accounting  and  plan- 
ning departments  are  speaking  the  same  language  which  under 
the  usual  methods  employed  they  certainly  are  not.  Further- 
more, coordination  of  these  departments  reduces  very  greatly 
the  work  in  connection  with  the  compilation  of  the  basic  data 
underlying  costs  and  planning  and  also  the  cost  of  the  routine 
work  in  connection  with  the  operation  of  the  system. 

W^ith  this  and  the  chapter  folhnving,  there  is  given  a  series 
of  diagrams  which  illustrate  the  principles  underlying  the  opera- 
tion of  a  coordinated  planning,  production,  and  cost  system, 
a  study  of  which  it  is  believed  will  demonstrate  the  very  material 
advantages  accruing  from  the  coordination  of  the  work  of  the 
planning  and  cost  departments.  This  plan  is  drawn  up  to  meet 
the  conditions  existing  in  a  concern  manufacturing  an  extensive 
line  of  standard  machinery — about  as  complex  a  condition  as 
will  ordinarily  be  met.  Obviously,  the  plan  is  complicated  and 
here  again  the  author  wishes  to  emphasize  his  contention  that 
any  really  efficient  plan  to  meet  complex  conditions  must  neces- 
sarily be  complicated  also. 

As  a  matter  of  fact,  most  manufacturers  who  believe  that 
the  system  they  employ  is  a  very  simple  one  are  under  a  delusion. 
The  author  calls  to  mind  an  instance  when  he  presented  to  a 
department  head  a  plan  covering  a  suggested  routine  for 
handling  a  certain  important  division  of  the  work  of  the  latter's 
department.  He  was  by  no  means  prejudiced  against  the  in- 
troduction of  improvements,  but  he  firmly  but  courteously 
rejected  the  plan  when  it  was  presented  to  him.  Upon  being 
asked  the  reason,  he  stated  that  it  was  "too  complicated." 
Whereupon  he  was  presented  with  another  diagram  with  about 
twice  as  many  forms  as  the  other  and  three  times  as  many  opera- 
tions and  asked  whether  that  looked  any  better.  After  he  had 
emphatically  stated  that  this  second  plan  was  far  worse  than 
the  first  presented  the  news  was  gently  broken  to  him  that  the 
second  plan  was  that  which  he  was  then  operating,  and  from 
this  point  no  difficulty  was  experienced  in  obtaining  his  enthu- 
siastic support  of  the  introduction  of  the  new  plan. 

Some  time  ago,  one  of  the  author's  assistants  made  a  careful 
analysis  in  diagram  form  of  the  system  employed  by  a  progres- 
sive manufacturing  concern,   and  in  order  to  ensure  that  the 


ii8 

chart  correctly  illustrated  the  routine  followed  this  was  sub- 
mitted to  one  of  the  officers  of  the  company  for  his  criticisms. 
This  gentleman,  after  satisfying  himself  of  the  accuracy  of  the 
chart,  stated  that  before  this  was  drawn  up  he  was  under  the 
impression  that  the  system  in  force  was  an  exceedingly  simple 
one  and  that  when  he  actually  saw  it  on  paper  and  realized 
how  complex  and  elaborate  it  really  was  he  nearly  had  heart 
failure. 

To  manufacturers  who  also  believe  that  their  methods  are 
very  simple  the  suggestion  is  made  that  they  select  some  bright 
young  man  in  their  organization  and  instruct  him  to  carefully 
chart  the  routine  followed  in  connection  with  handling  a  cus- 
tomer's order  from  its  receipt  in  the  mail  up  to  the  billing  and 
shipping  of  the  goods  and  the  determination  of  the  profit  or 
loss  realized  on  the  order.  Make  it  clearly  understood  that 
every  step  must  be  illustrated.  If  the  resultant  chart  is  not  quite 
elaborate  and  complex,  either  the  business  is  abnormally  simple, 
the  bright  young  man  a  master  in  the  skilful  elimination  of  facts 
or  the  system  far  more  efficient  than  any  which  it  has  been  the 
author's  privilege  to  pass  upon. 

It  is  somewhat  surprising  that  in  connection  with  one  of  the 
most  complex  things  which  the  world  has  ever  known,  namely 
the  modern  business,  manufacturers  and  business  men  generally 
should  expect,  or  even  hope,  to  attain  extreme  simplicity  in 
methods.  All  simplicity  possible,  assuredly,  but  not  simplicity 
obtained  at  the  expense  of  inadequate  results  and  unduly  costly 
methods.  The  practical  man  realizes  that  he  cannot  expect  to 
get  simplicity  beyond  a  certain  point  in  the  design  of  a  high- 
grade  automobile,  an  aeroplane,  a  locomotive,  a  battleship,  or  a 
submarine,  and  further  that  the  design  of  these  calls  for  ability 
and  extensive  training  and  yet  he  will  believe  it  possible  for 
his  own  highly  complex  business  to  be  handled  efficiently  in  some 
remarkably  simple  manner,  which  he  leaves  the  members  of  his 
organization,  who  have  had  no  special  training  in  the  formula- 
tion of  efficient  routine  methods,  to  find  out. 


Why  Complex   Business  Demands   Complex   Systems 

There  is  no  way  of  avoiding  considerable  complexity  in  the 
design  of  systems  to  efficiently  handle  a  complex  business,  but 
as  was  previously  stated  the  complexity  should  stop  right  there 
for  a  system  which  is  unduly  difficult  to  operate  is  to  that  extent 


^ 


'L4 


STANDARD  PART  LIST  Et  SEQUENCE  OF  OPERATION 

■nbly      M?i^J'^-''f^"l'. Ctossof  Produef,,!...---     5hee>s  Sheef  r<o.T_,  ?  ps 


pSUMHARIZEDSr&NDARO OPERMlOfJ CARD  rOR  ASSEMBLIES 


^^^UMMARIZEOSTfcNDARDM^TERIfcLCARD  FOR  ASSEMBLIES 


SUMMARY  OFSTANDARO  TIMES         1 
NomofAsscraMs  *J//to7*r/iOTW  .AasertiHaltt.ajr.  | 

DEPARTMENT 

«s  m 

NAME 

NO. 

HO. 

«,.*,„, 

30 

DnII 

r? 

100 

«<«*»,»„. 

12 

fbwrrSfitar 

a»tsTT«/wi 

V 

£V«  A/fAr 

li 

l> 

^HfH 

r 

I^J^ 

■ — M 

SECTION    I 


■' 

SUMMARY  OFSTANPARD   COST 

AND 

REVISED     CURRENT  COST  STATEMENT 

MACHINE 

COST 

aSounV 

«JSn" 

«ATER,*L^(B4C(a.ses) 

V. 

Nalltable  Irvn 

w- 

Nufsand  mishtrs 

f^ 

eimvjro/}  Casttnos 

Springs 

esw 

LABOB:(euD9pti) 

//  Carpen/trS^p 

IZ  dladamifh  Q/fh/ra 

J5  8/iKtemrffi  fbrqt 

'ilODICAL  REVISIONS  OF 

f4  8otf  Dtparfrrrenf 

STANDARD  COSTS  TVOmiN 

ThE  APPROXIMATELY 

TOTAL  LABOR 

rsoo 

BURDEH.f&jMacherouD) 

ih 

s.oo 

rh 

TOTAI 

3.S0 

XD— ; 

•O  Blacksmith  Fbrgt 

s.     /  Bulldo^trs 

1  oo 

\  3  Bnidlet4  Mammrrs 

yS  floor  Grinder 

etc 

TOTAL 

IS.OO 

TOTAL  BURDEN 

TOTAL   COST 

120.  oo  \ 

sJ 

=i 

— 

SECTION  n 


Figs,  9  and  10.— Diap-am  illustrating  coordinated  cost,  planning  and  production  system. 
Sections  I  and  2.  Illustrating  method  of  compilation  of  standard  cost  and  planning  datt. 


\To  face  page  itf. 


GRAPHIC  MATERIAL^^o  PRODUCTION  CONTROL  RECORD 

Nameof  Assemblij  No.3l P.'anferFrarm  "    Ho.  1357 

Section  No.ii2__  No.of  Assemblies _iZg—   f^citefaComp|gl4  fekSM. 


♦  PART  PRODUCTION  DA.TE  SCALE  Jan.    7    B    9    10   II    I2   14   15  16  17    le 


STANDARD  PART  LIST 

NnrnfrtfA-^cpmhlu     '^  i:  Pra'rftrFrane                     CLASS  OF  PRODUCT  7, 

r^^T  CR.  1   ^L_ 

^ 

fvTTOw  WhtilSpi^Cax 

3/3 

Malleabla 

SfS 

PC. 

UadinsLe*erQt,f> 

6*9 

1 

" 

^9 

P£- 

fUjsfKrOek'AOj.  Wasfier 

9*9 

'I 

€C  TIOMOf  SW  !tD*RD  PMfT 

^ 

^t€dConfroSer5prim 

10* 

'1 

F  <»e/UnOfrS  (5££  SECTION  I)                T^ 

LrfiiiKiU^rLakh  Bxi 

I09 

' 

i'rZSi  CR 

l?3l 

Pc. 

i^RLg^ 

eJ    M^ 

~""^- . 

1 

^ 

GRAPHIC  MATERIAL^No  PRODUCTION  CONTROL  RECORJ) 


FOaOWUPOFHXTEfflAUEQUlREMEHlS BYPRODUCT  CUSS 

S' 

MWI«D 

S.O«T 

I4Q 

d 

Iff 

153} 
3 

600 

*■ 

SECTION    W 


Figs,  li  and  iz.— Diagram  illustrating  coordinated  cost,  planning  and  production  system. 
Section  3.  Illustrating  routine  in  connection  with  machine  group  planning  and  control. 
Section  4.  Illustrating  routine  in  connection  with  material  and  production  control. 


\To  face  fage  tip. 


c 


119 

defective  in  design.  Some  of  the  most  complex  pieces  of 
machinery  in  common  use  are  simple  enough  to  operate;  if  they 
were  not  they  would  not  be  in  common  use.  What  proportion 
of  telephone  users  have  any  real  conception  of  the  means  by 
which  the  sound  of  their  voices  is  carried  over  the  telephone 
wires,  yet  ignorance  in  this  respect  does  not  in  any  way  detract 
from  the  value  of  the  service  they  receive  from  their  telephone. 
Take,  as  an  example,  the  magnificent  twin-six  automobile  which 
we  often  see  skillfully  driven  by  women.  The  design  of  that 
machine  represents  the  crystallized  experience  of  a  multitude  of 
skilled  engineers,  electricians,  and  others.  But  do  many  women 
know  about  all  of  its  manifold  parts  and  complications?  The 
reader  knows  perfectly  well  that  the  chances  are  that  they  do 
not,  in  fact,  it  is  quite  possible  that  they  do  not  know  the  dif- 
ference between  the  differential  and  the  carburetor,  and  if  they 
have  given  any  thought  to  the  matter  at  all,  which  is  to  be 
doubted,  it  is  more  than  possible  that  reasoning  by  analogy  and 
bearing  in  mind  the  heating  system  in  their  own  homes  they 
believe  that  the  function  of  the  radiator  is  to  keep  the  engine 
warm ! 

In  the  previous  chapters  of  this  volume  the  diagrams  illus- 
trated were  confined  to  the  work  of  the  cost  department  and 
to  the  compilation  of  cost  and  efficiency  data.  As  was  stated, 
however,  one  of  the  essential  requirements  of  a  cost  system  is 
that  it  should  be  coordinated  with  the  work  of  the  production 
and  allied  departments,  so  that  duplication  of  work  and  over- 
lapping of  authority  can  be  avoided.  The  coordination  of  sys- 
tems of  cost  predetermination  with  the  factory  planning  systems 
along  the  lines  of  those  described  in  this  volume  is  a  logical  and 
inevitable  development  of  the  predetermined  cost  idea  and  until 
such  coordination  is  realized  both  the  cost  and  planning  systems 
must  necessarily  fall  far  short  of  the  ideal. 

The  Diagrams  of  a  Coordixated  System 

The  diagram  illustrating  the  coordinated  cost,  planning  and 
production  system  to  be  described,  is  divided  into  eight  related 
sections.     These  are  as  follows: 

1-2  jMethod  of  compilation  of  standard  cost  and  planning 
data   (Figures  9  and   10) 
3  Routine   in   connection   with   machine-group   planning 
and  control  (Figure  11) 


I20 


4  Routine  in   connection  with  material   and  production 

control   (Figure  12) 
5-6  Routine  in  connection  with  planning  and  dispatching 

control   (Figures  13  and   14) 
7-8  Routine  in  connection  with  cost  and  efficiency  control 

(Figures  15  and  16) 

In  the  plan  illustrated  full  advantage  is  taken  of  the  increased 
facility  in  planning  and  recording  production,  afforded  by  the 
use  of  graphic  charts,  two  such  charts  being  illustrated,  the 
machine  group  planning  and  control  board  (Form  3 A,  Figure 
11)  and  the  graphic  material  and  production  control  record 
(Form  4A,  Figure  12). 


The  Development  of  the  Graphic  Idea 

The  modern  development  of  the  picture  or  graphic  idea  in 
connection  with  records  of  production,  etc.,  has  been  in  response 
to  the  demand  for  some  plan  which  would  furnish  immediate 
information  relative  to  the  progress  of  work  in  the  shops,  ex- 
pressed in  such  form  as  instantly  to  draw  attention  to  the  salient 
features  of  the  situation.  Under  the  older  method  of  production 
accounting,  this  information  would  be  buried  in  books  of  record 
involving  a  regular  mining  operation  to  bring  to  the  surface. 

For  instance,  in  the  case  of  a  concern  manufacturing  a 
standard  line  of  machinery  involving  the  manufacture  of  thou- 
sands of  parts  many  of  which  would  be  common  to  several 
machines,  in  the  older  method  of  production  accounting  a  record 
would  be  maintained  in  book  form  of  the  manufacture  and  use 
of  each  part,  a  sheet  in  the  book  being  provided  for  each  part. 
To  determine  what  the  manufacturing  situation  at  any  time 
was  as  regards  these  parts  it  would  be  necessary  to  abstract  the 
balances  of  the  part  record  and  apply  these  against  the  require- 
ments of  the  various  machines  to  be  manufactured,  taking  into 
account  the  fact  that  this  assembly  might  reciuire  four  of  a 
given  part,  while  another  would  only  use  two  of  that  part.  The 
compilation  of  this  information  being  a  laborious  undertaking 
it  would  only  be  done  at  considerable  intervals  and  even  then 
would  not  be  up-to-date,  so  that  when  information  was  required 
relative  to  the  manufacturing  position  the  usual  procedure  would 
be  to  visit  the  bins  or  shelves. 

In  factories  where  such  methods  are  employed  it  will  be  found 


-R" 


BOA    R    D. 


WH  I 
I  CAJ 
I   OH 

I  KOI 

iach: 


OPERATION    TRACER 

Pai-t»lcr--Sl3 

Furrow  Wheat Sprinp  Case 


Ho. of  Pieces  Requireat  SIO 
Lot  No.  450     - 


OPERATION  loePTC^J'J^'IpiECES 


Grind 


Sloittng 


4-50 


«JOB       NOW 
.BEIN<3   ,  WORKED 
ON 


>TB<(i 


^ 


[too 


HUk-rtRlilL  MOVED 
EQUlPHEKTMOveO 


.Ml 


NEXT     UOE> 
M/\TERIM_    A.ND 
EQUIPMENT  MOVED 

TO       MACHINE.. 


RKF! 

^  MAd 

i   CAfl 


<JO  BS     AHEAD 

PREPARATION    NOT 

COMPLETE. 


[^"^ 


]         [ 


]        [ 


ATTENDANCE 


BOARD 


jSapttata 

sp^ 

„.., 

= 

SECTION      TZI 


■    Fios.  13  and  I4.-Diagram  illustrating  coordinated  cost,  planning  and  production  system. 
Sections  5  and  6.  Illustrating  preparatory  work  in  planning  department  and  rouUne  in  shops  in  connection  with  performance  of  operations. 


i^\ 


CURRENT      COSTS 


CTI0N5  I  /^NO  n  ,         J 


OF 
SECTIONS 


UMMARY     OF     STANDARD     COST- 

AND 

REVISED     CURRENT   COST  STATEMENT 


I  CURRENT      COSTS 


ARY     Of=     STANDARD     COST 


SECTION      lan 


Figs.  15  and  16— Diagram  illustrating  coordinated  cost,  planning  and  production  system. 
Sections  7  and  8.  Illustrating  operations  in  connection  with  figuring  costs  of  sales,  current  costs  and  manufacturing  efficiency  data. 


• 


r' 


121 


that  time  and  time  again  the  completion  of  machines,  urgently 
required  by  customers,  will  be  delayed  owing  to  the  absence 
of  one  or  two  minor  parts  and  very  often  it  will  be  discovered 
at  a  late  date  that  owing  to  some  oversight  material  necessary 
for  the  manufacture  of  some  essential  part  has  not  even  been 
ordered.  In  many  factories  there  is  an  appalling  waste  of  the 
time  of  superintendents  and  other  high-priced  men  owing  to 
defective  routine  such  as  has  been  described,  a  large  proportion 
of  many  a  superintendent's  time  being  employed  in  what  is 
known  as  "stock  chasing." 

A  considerable  forward  step  was  made  when  the  information 
incorporated  on  the  parts  records  was  plotted  on  graphic  charts 
which  showed  at  all  times  what  the  manufacturing  situation  was 
as  regards  the  parts  required  for  the  completion  of  the  various 
machines  included  in  the  manufacturing  schedule.  Compared 
with  the  older  method  where  information  was  buried  in  the  stock 
records  the  new  plan  under  which  the  superintendent  and  his 
assistants  had  before  them  a  picture  showing  at  all  times  which 
parts  were  available  and  which  were  behind  schedule  presented 
such  marked  advantages  that  it  has  not  been  realized  in  the  ma- 
jority of  cases  that  even  the  new  method  falls  short  of  the  ideal. 


Material  and   Production   Records 

The  shortcomings  of  a  plan  under  which  the  progress  of 
work  is  plotted  on  a  chart  by  means  of  lines  which  are  extended, 
or  pins  which  are  moved,  from  day  to  day,  as  manufacturing 
progresses,  are  as  follows.  The  record  showing  as  it  does  only 
the  position  at  date  cannot  be  used  to  show  comparisons  of  the 
position  at  different  dates.  In  some  cases  this  disadvantage  has 
been  realized  and  overcome  to  a  limited  extent  by  taking 
photographs  of  the  production  boards  at  intervals.  This,  how- 
ever, must  be  admitted  to  be  a  make-shift  method.  The  plan 
involves  an  undesirable  duplication  of  work,  the  information 
first  requiring  to  be  recorded  on  the  written  records  and  from 
these  plotted  on  the  graphic  chart. 

It  was  a  realization  of  the  shortcomings  of  the  method 
described  which  led  the  author  to  develop  a  plan  under  which 
the  written  record  is  combined  with  the  graphic  chart  and  this 
method  is  illustrated  in  the  graphic  material  and  production 
control  record  shown  in  Form  4A,  Figure  12.  In  this  illustra- 
tion the  manufacturing  position  as  regards  the  manufacture  of 


parts  for,  and  the  assembling  of,  a  planter  frame  is  shown  as 
at  two  dates;  the  upper  illustration  showing  the  position  at 
January  17  before  assembling  was  commenced,  and  the  lower 
the  position  a  month  later  after  assembling  was  well  under  way. 

The  heavy  perpendicular  red  line  reflects  the  material  situa- 
tion. When  all  of  the  raw  material  necessary  for  the  manu- 
facture of  a  part  is  available  this  red  line  is  filled  in;  if  only 
part  of  the  material  required  is  available  a  horizontal  red  line 
is  drawn  to  the  point  on  the  scale  corresponding  to  the  number 
of  the  parts  which  can  be  made  from  the  available  material. 
For  instance,  on  the  upper  section  of  the  illustration  it  will  be 
seen  that  at  January  17  all  of  the  material  necessary  for  the 
manufacture  of  the  first  two  parts  listed  (Nos.  313  and  649) 
was  available,  but  that  as  regards  the  third  part  listed  (No.  368) 
material  was  only  available  to  manufacture  780  parts,  and  as  two 
of  these  parts  are  required  for  each  planter  frame  the  horizontal 
red  line  is  drawn  to  the  390  point  on  the  assembly  scale  shown 
at  the  bottom  of  the  chart. 

Production  of  parts  is  show^n  by  daily  postings  of  cumulative 
totals,  postings  for  any  day  being  made  in  the  column  coming 
under  that  day  according  to  the  part  production  date  scale  shown 
at  the  top  of  the  chart.  For  instance  on  January  17  (the  date 
at  which  the  position  is  shown  in  the  upper  illustration)  510 
pieces  of  part  No.  649  were  completed,  and  accordingly  this 
quantity  is  posted  on  the  line  of  this  part  in  the  column  of 
January  17  on  the  part-production  date  scale.  The  position  as 
regards  part  manufacture  is  shown  graphically  by  means  of  red 
pins  placed  at  the  point  of  the  assembly  schedule  scale  repre- 
sented by  the  number  of  parts  manufactured.  For  instance,  in 
the  case  of  part  No.  649,  just  referred  to,  only  one  of  these 
parts  being  required  in  a  planter  frame,  the  production  of  510 
pieces  of  this  part  fully  meets  the  requirements  of  the  schedule 
for  510  assemblies,  and  accordingly  the  red  pin  is  placed  to  the 
extreme  right  of  the  line  provided  for  this  part,  indicating  that 
production  thereon  is  complete. 

A  glance  at  this  chart  will  give  all  salient  information  rela- 
tive to  progress  made  in  connection  with  the  manufacture  of 
the  planter  frame  taken  as  an  illustration.  It  will  be  seen  that 
work  held  up  on  part  No.  109  owing  to  lack  of  material,  that 
work  will  shortly  be  held  up  on  part  No.  368  for  the  same 
reason,  and  the  chart  also  clearly  indicates  which  parts  have  been 
produced  to  meet  total  requirements,  and  which  parts  are  lagging 
in  production. 


123 

In  the  lower  illustration,  which  represents  the  position  of 
work  on  the  planter  frame  a  month  later,  it  will  he  ncjted  that 
the  proj^ress  of  assembling  is  indicated  by  a  black  perpendicular 
line,  and  that  all  assembling  is  held  up  owing  to  the  material 
for  part  No.  109  still  being  unavailable.  A  valuable  feature  of 
this  method  of  showing  the  progress  of  assembling  by  means  of 
a  perpendicular  line  in  a  business  where  one  part  is  common 
to  several  assemblies,  is  that  the  chart  shows  instantly  which 
parts  can  be  borrowed  for  another  assembly  without  necessitating 
tearing  down  assemblies  already  completed.  For  instance,  in 
the  case  illustrated  it  will  be  seen  that  510  pieces  have  been 
made  of  part  No.  313,  but  as  200  asseml^lies  have  been  com- 
pleted, as  indicated  by  the  perpendicular  black  line,  only  310 
pieces  of  this  part  are  available  without  necessitating  tearing 
down  assemblies. 


Chapter  VI 

THE    BIPORTANCE    OF    DELIBERATION    IN 
INTRODETING    CHANGES 

THE  old  saying,  "More  haste,  less  speed,"  applies  with 
particular  force  to  the  efforts  which  are  so  often  made 
to  introduce  new  methods  of  cost  accounting,  planning,  and 
production,  without  proper  deliberation  at  the  outset.  Though 
the  "do  it  now"  slogan  is  excellent  considered  as  a  warning 
to  the  habitual  procrastinator,  it  is  not  a  policy  to  be  followed 
blindly  when  dealing  with  so  necessarily  a  complex  proposition 
as  a  system  of  routine  methods  suitable  for  the  modern  business. 

Manufacturers  do  not  always  realize  that  the  desire  which 
they  express  for  an  immediate  showing  is  often  the  direct  cause 
of  hasty  and  unwise  action  on  the  part  of  those  to  whom  they 
intrust  the  work  of  introducing  improved  methods  in  their  fac- 
tories and  offices.  There  is  no  royal  road  to  learning  and  neither 
is  there  any  easy  path  to  business  efficiency. 

The  simplest  and  most  direct  manner  in  which  to  obtain  the 
desired  results  from  a  system  of  cost  accounting,  planning  and 
production  is  not  going  to  be  stumbled  upon  by  accident;  it  can 
only  be  found  by  careful  and  deliberate  thought  directed  toward 
the  end  in  view. 

There  is  a  serious  feature  in  connection  with  losses  due  to 
improperly  designed  routine  methods  which  is  often  overlooked; 
a  loss  such  as  a  bad  debt  can  be  written  off  and  in  course  of 
time  forgotten,  but  there  is  no  finality  to  the  loss  due  to  ineffi- 
cient methods,  for  these  involve  a  continued  drain  on  a  busi- 
ness and  a  mortgage  upon  its  future.  In  a  large  business  it  is 
nothing  unusual  to  find  that  owing  to  careless  design  of  the 
system  employed,  it  is  necessary  to  retain  on  the  payroll  six 
more  clerks  than  would  be  required  had  sufficient  thought  been 
given  when  formulating  the  plan  to  the  question  of  economy 
in  operation.  Possibly  a  thousand  dollars  was  saved  at  the  out- 
set through  employing  semicompetent  assistance  in  designing 
the  system  and  in  hurrying  its  installation,  but  if  ever  there 
was  a  case  of  saving  at  the  spigot  and  losing  at  the  bunghole 

124 


125 

it  is  here,  for  the  cost  of  six  clerks,  say  $6ooo  a  year,  represents 
6  per  cent  interest  on  an  investment  of  $100,000. 

Carefully  Planned  Changes  Build  Morale 

There  is  a  sound  psychological  truth  underlying  the  proverb 
"Nothing  succeeds  like  success,"  and  there  is  nothing  so  damag- 
ing to  the  morale  of  an  organization  as  the  consciousness  of 
failure.  The  haphazard,  hit-or-miss  methods  employed  so  often 
in  introducing  changes  in  routine  methods,  involving  as  they 
do  a  continuous  process  of  trial  and  error  and  the  everlasting 
changing  of  forms,  are  detrimental  in  the  extreme  to  the  spirit 
of  shop  and  office  employees,  while,  on  the  other  hand,  changes 
introduced  after  proper  deliberation  and  with  satisfactory  results 
develop  a  spirit  of  optimism  toward  later  attempts  at  bettering 
conditions  which  aids  materially  in  the  achievement  of  success. 

Far  too  often  the  procedure  followed  in  the  effort  toward 
introducing  improved  methods  in  a  business  is  the  reverse  of 
what  is  correct ;  instead  of  starting  at  the  foundations  and  laying 
out  a  comprehensive  general  plan  and  then  developing  the  details, 
minor  questions  are  considered  first  and  the  general  plan  left  to 
take  care  of  itself.  The  executive,  however,  demands  imme- 
diate results  and  as  a  consequence  of  his  misguided  "do  it  now" 
policy,  without  proper  preparation,  with  little  if  any  data  and 
with  no  definite  general  plan,  a  start  is  made. 

The  natural  result  of  introducing  details  before  the  general 
plan  is  formulated  is  disappointment  and  wasted  effort.  Such 
a  method  of  approaching  the  problem  is  like  the  roads  which 
the  Russian  soldiers  followed  in  the  Masurian  swamps,  they 
looked  all  right  at  the  start  but  they  led  to  disaster. 

General  Manufacturing  Position  jMust  Be  Shown 

The  average  planning  system,  as  is  to  be  expected  considering 
the  methods  followed  in  introducing  it,  is  strongest  at  the  detail 
end.  It  shows  clearly  the  immediate  requirements  against 
machines,  but  is  exceedingly  defective  when  it  comes  to  showing 
the  general  manufacturing  position,  that  is  the  total  work  ahead 
of  machines  represented  by  all  orders  on  hand,  in  comparison 
with  the  capacity  of  the  machines.  The  facultv  of  bringing  all 
information  relative  to  manufacturing  requirements  and 
resources  to  a  focus  and  of  being  able  to  present  a  bird's-eye 


126 

view  of  the  general  situation  so  that  the  sales  and  manufac- 
turing executives  can  direct  their  policies  intelligently  on  the 
basis  of  a  complete  knowledge  of  the  situation  is  the  supreme 
test  of  the  comprehensiveness  of  the  general  plan.  When  this 
is  coupled  with  complete  detailed  control  all  along  the  line  and 
coordinated  with  adequate  cost  and  efficiency  records,  then  and 
only  then  have  we  a  plan  that  can  be  considered  suitable  to 
meet  the  needs  of  the  modern  manufacturer. 

The  machine  group  planning  and  control  board  illustrated 
in  Form  3A,  Figure  11  provides  the  manufacturer  with  the  bird's- 
eye  view  of  the  manufacturing  situation  referred  to  in  the  pre- 
ceding paragraph.  This  board  shows  graphically  the  extent  to 
which  the  capacity  of  all  machines  in  the  shop  is  appropriated  to 
manufacturing  schedules  and  also,  approximately,  when  comple- 
tion of  the  various  classes  of  product  required  by  the  sales  depart- 
ment on  various  dates  may  be  expected. 

In  this  machine  group  planning  and  control  board  capacity 
of  machines  is  appropriated  to  manufacturing  schedules  by  the 
use  of  scaled  cards.  As  shown  in  Form  3B,  Figure  11,  an 
allowance  of  10  per  cent  of  capacity  is  made  to  cover  break- 
downs, work  on  special  repair-part  orders,  etc.,  so  that  the  scale 
for  one  machine  for  nine  days  covers  ten  days  according  to 
the  date  scale.  Different  scales  are  provided  for  machine  groups 
when  there  is  more  than  one  machine  performing  identical  work, 
the  scale  for  a  three-machine  group  for  a  given  number  of 
machine  hours  being  one-third  of  that  of  the  one-machine  scale. 

When  a  manufacturing  schedule  is  made  for  any  class  of 
product  for  completion  during  a  given  month,  the  total  standard 
hours  for  each  machine  group  necessary  for  the  completion  of 
this  schedule  is  figured  (Form  3D,  Figure  11)  and  cards  of 
the  requisite  length  are  cut  for  each  machine  group,  these  cards 
being  placed  in  the  slots  for  the  proper  machine  groups  on  the 
machine  group  planning  and  control  board.  Different  colored 
cards  are  used  for  the  various  months  in  which  completion  of 
the  different  schedules  is  called  for,  these  colors  corresponding 
with  those  used  for  the  same  months  on  the  date  scale  at  the 
top  of  the  board.  For  example,  the  standard  days  of  machine 
time  on  the  power  shears  required  for  the  planter  schedule  to 
be  completed  in  Fel^ruary  was  125  (refer  again  to  Figure  11). 
There  were  three  machines  in  this  group,  so  that  a  card  of 
the  color  chosen  to  indicate  the  month  of  February  was  cut 
on  the  three-machine  group  scale  (Form  3E,  Figure  11).  This 
card  placed  in  the  machine  group  planning  board  in  the  power 


127 

shear  slot  extends  slif^^htly  beyond  the  February  date  scale  so 
that  it  will  be  obvious  that,  unless  the  efficiency  of  these  machines 
proves  to  be  better  than  standard  or  overtime  is  worked,  it  will 
be  impossible  to  complete  the  planter  schedule  in  the  time  set. 

The  board  is  kept  up  to  date  by  obtaining  through  an  auto- 
matic sorting  and  tabulation  of  the  operation  cards  (Forms  3H 
and  3G,  Figure  1 1 )  the  standard  hours  of  work  produced  by 
each  machine  group  for  each  class  of  product  scheduled  for 
completion  in  different  months,  the  cards  in  the  machine  group 
planning  and  control  board  being  cut  down  accordingly.  Each 
day  the  date  line  on  the  board  is  moved  forward  as  illustrated, 
the  cards  in  each  slot  being  brought  into  alignment  therewith. 

In  order  to  indicate  at  a  glance  what  proportion  of  the  work 
of  a  machine  group  on  a  schedule  has  been  completed,  a  diagonal 
line  is  drawn  across  the  card  so  that  the  position  of  the  com- 
mencement of  this  line  at  the  point  where  the  card  was  cut 
down  will  show  the  proportion  of  the  card  cut  off.  This  is  illus- 
trated in  Figure  10 A. 


DATE     SCALE 

|24|23|22|2l|20|l9|l8|n|l6|l5|l4|l3|l2|ll  ll0|9|&|7|6|5|4|3|2|l  | 

1        ^- 1 

■  ■    Original  Card-24  Days  -' 

Pari  ion  of  .^ ^-                          1 

Card  /'                                    Qr,e  rh/rd  of  Work  Done 

'-'-''    --^^^^M:-       ;,    v.. 1 

One  Half  of  Work  Done 

Fig.  ioA. — Diagram  illustrating  use  of  diagonal  line  to   indicate  proportion  of 
work  performed  on  manufacturing  schedule. 

The  advantages  of  this  board  to  the  sales  and  manufacturing 
executives  are  obvious.  It  indicates  which  classes  of  machines 
have  not  sufficient  work  ahead  of  them  and  those  where  capacity 
is  insufficient.  It  shows  what  effect  on  the  date  of  completion 
of  the  schedule  for  one  class  of  product  will  residt  from  schedul- 
ing another  class  of  product  concurrent  wath  or  ahead  of  those 
already  scheduled.  It  does  not  pretend  to  control  detailed  opera- 
tions but  it  represents  the  key  to  the  whole  manufacturing 
situation. 

In  the  previous  chapter  the  operation  of  the  graphic  material 
production  and  control  record  (Form  4A,  Figure  12)  was  dis- 
cussed at  considerable  length.     This  record  shows  at  any  time 


128 

the  progress  made  as  compared  with  the  schedule  of  the  manu- 
facture of  parts  and  the  completion  of  assemblies,  and  holds  an 
intermediate  position  in  the  series  of  graphic  mediums  employed 
in  the  control  of  production  under  the  system  illustrated  in  the 
series  of  eight  diagrams.  Detailed  control  of  operations  to 
individual  machines  is  obtained  through  the  medium  of  the  dis- 
patch board  (Form  6A,  Figure  14),  the  operation  of  which  is 
fully  explained  in  the  text  accompanying  the  diagram. 


The  \^ariety  of  Ixformation  Obtainable 

One  very  important  advantage  resulting  from  the  careful 
planning  of  a  coordinated  cost,  production  and  planning  system, 
is  the  possibility  of  so  arranging  original  records  that  a  mul- 
tiplicity of  results  can  be  obtained  therefrom  merely  by  resorting 
and  retabulating  the  cards  on  which  the  original  data  are  re- 
corded. Examples  of  the  variety  of  information  obtainable  in 
this  manner  and  without  rewriting  are  as  follows : 

Material  Operation  Card 

1  To   obtain   material   requirements   for  the   entire  manu- 

facturing schedule  (see  first  automatic  tabulation  of 
material  operation  cards,  Figure  12) 

2  For  following  up  material  deliveries  and   for  applying 

material  received  to  individual  schedules  (see  second 
automatic  tabulation  of  material  operation  cards, 
Figure  12) 

3  For  recording  material  issues  (see  third  automatic  tabu- 

lation of  material  operation  cards,  Figure  12) 

4  To  obtain  material  distribution  by  material  and  product 

classes  and  variations  in  costs  due  to  price  fluctuations 
(see  fourth  automatic  tabulation  of  material  operation 
cards,  Figure  16) 

5  To  obtain  variations  in  material  cost  due  to  fluctuations 

in  price  as  compared  with  standard  (see  fifth  automatic 
tabulation  of  material  operation  cards.  Figure  16) 

In  addition  to  the  above  uses  the  material  operation  card  is 
also  employed  as  a  material  move  ticket  as  explained  in  the  text 
accompan}ing  Figure  13. 


129 

operation  Card 

1  To  obtain  standard  hours  produced  by  machine  f^roups 

by  production  schedules  for  the  purpose  of  the  machine 
group  plamiing  and  control  board  (Figure  ii) 

2  By  tabulating  cards  for  last  operation  only,   to  obtain 

production  of  parts  for  purpose  of  graphic  material 
and  production  control  record  (Figure  ii) 

3  For    obtaining   distribution    of    labor,    both    actual    and 

standard,  by  classes  of   product  and   for  distribution 
of  machine  burden  by  classes  of  product  (Figure  15) 

4  To  obtain  actual  and  standard  labor  costs  by  departments 

for   the    purpose    of    the    summarized    manufacturing 
statement  (Figure  15) 

5  To   obtain   ratios  of   actual   to   standard   labor   cost   by 

departments  and  product  classes   for  the  purpose  of 
adjusting     standard     costs     to     current     cost     basis 
•     (Figure  16) 

In  addition  the  operation  card  is  used  for  the  making  up  of 
the  payroll  and  the  figuring  of  the  efficiency  of  individual 
operators,  and  classes  of  operators. 


Chapter  VII 
THE    PRINCIPLES    OF    SCIENTIFIC    MANAGEMENT 

THE  general  trend  of  progress  would  seem  to  have  made 
certain  discoveries  more  or  less  inevitable.  The  discovery 
of  the  heavier-than-air  flying  machine  was  a  natural  concomitant 
to  the  development  of  the  internal  combustion  engine  and,  doubt- 
less, if  the  Wright  Brothers  had  not  invented  the  aeroplane  w^hen 
they  did  some  other  inventor  would  have  done  so  before  long. 
In  fact,  the  modern  aeroplane  may  be  said  to  have  been  merely 
a  combination  of  two  other  inventions,  for  Langley's  model 
actually  flew  when  its  original  motor  was  replaced  by  a  modern 
aeroplane  engine.  Likewise  the  principle  of  selection  'was  "in 
the  air"  when  Darwin  discovered  it  as  is  evidenced  by  the  same 
idea  occurring  simultaneously  and  independently  to  Alfred  Rus- 
sel  Wallace. 

In  the  same  manner  it  was  inevitable  that  the  idea  of  scientific 
management  would  l^e  developed,  for  even  if  Frederick  Taylor 
had  not  undertaken  his  investigation  the  demands  of  the  indus- 
trial world  for  some  more  scientific  means  of  meeting  manu- 
facturing problems  than  were  previously  employed  would  have 
rendered  the  introduction  of  the  scientific  management  idea  a 
foregone  conclusion. 

Coming  as  it  did  as  a  direct  response  to  the  needs  of  the 
manufacturing  world  for  some  improvement  over  the  old-time 
haphazard  methods  of  management,  the  industrial  world  was 
ripe  for  the  acceptance  of  the  idea  of  scientific  management 
and  this  made  such  headway  with  the  progressive  manufacturing 
element  that,  though  it  is  only  about  15  years  since  Taylor 
presented  his  famous  paper  on  "Shop  ]\Ianagement"  to  The 
American  Societv  of  jMechanical  Engineers,  there  is  hardly  a 
manufacturing  concern  of  any  magnitude  that  does  not  apply 
to  some  extent  the  principles  which  he  enunciated. 

SciEXTiFic  Management  a  Natural  Trend 

The  idea  of  predetermined  results  and  standardized  methods 
was  in  line  with  the  natural  trend  of  the  engineer's  mind  and 

130 


131 

his  methods  of  working  as  applied  to  machine  design  and  con- 
struction, for  no  engineer  would  think  for  one  moment  of  huild- 
ing  a  machine  witliout  first  carefully  laying  plans  on  paper, 
and  accordingly  Taylor's  idea  of  employing  constructive 
imagination  in  the  field  of  factory  production  was  welcomed 
hy  the  engineering  mind  as  being  entirely  logical  and  proper. 

It  takes  time,  however,  for  the  full  significance  of  an  im- 
portant new  idea  or  discovery  to  be  realized  and  what  would 
seem  obvious  and  inevitable  applications  of  such  an  idea  when 
considered  in  the  retrospect  are  often  very  slow  in  being  adopted. 
The  Roentgen  rays  were  discovered  in  1895,  but  only  in  recent 
years  has  the  dental  profession  taken  advantage  to  any  extent 
of  the  tremendous  assistance  in  oral  diagnosis  which  is  afforded 
by  the  use  of  radiography,  the  introduction  of  which  in  this 
profession  is  revolutionizing  the  methods  employed. 

A  classical  instance  of  the  failure  of  the  human  mind  to  grasp 
the  significance  of  any  new  idea  is  associated  with  the  discovery 
of  ether  in  1530,  for  though  it  was  used  ten  years  later  by 
Paracelsus  to  make  animals  unconscious  under  experiments, 
three  hundred  years  of  human  suffering  elapsed  before  the  im- 
portance of  the  experiments  of  Paracelsus  was  appreciated  and 
ether  used  for  the  alleviation  of  the  pain  of  humanity. 

In  a  similar  manner  the  full  significance  of  the  scientific 
management  idea  has  not  been  realized,  the  application  of  the 
principles  of  this  science  being  still  in  the  main  confined  to  the 
shops.  Even  Frederick  Taylor  himself  did  not  fully  realize  the 
far-reaching  possibilities  of  the  principles  he  developed — essen- 
tially a  shop  man,  his  horizon  was  in  the  main  limited  to  shop 
problems,  and  later  exponents  of  these  principles  have  largely 
followed  in  his  footsteps. 

SciEXTiFic  ]\Iaxagemext  ]\Iore  Thax^   Shop   IMaxagemext 

To  most  writers  on  the  subject,  scientific  management  means 
scientific  shop  management  and  nothing  more.  Mr.  C.  Bertrand 
Thompson  in  the  voluminous  collection  of  articles  on  scientific 
management  edited  by  him  defines  this  subject  as  follows: 

The  aim  of  scientific  management  is  to  correlate  and  systematize  all 
of  the  best  development  in  factory  administration  and  to  push  development 
further  in  accordance  with  the  principles  discovered. 

Another  writer  states: 

The  aim  of  scientific  management  is  to  manage  production  in  such  a  way 
that  higher  wages  bring  a  decreased  cost. 


132 

Shorn  of  all  non-essentials,  the  underlying  idea  of  scientific 
management  is  the  predetermination  of  results  and  the  standard- 
ization of  methods  and  conditions.  Instead  of  working  to  more 
or  less  nebulous  ends,  under  scientific  management  methods 
definite  ideals  are  established  and  all  efforts  concentrated  to- 
wards the  attainment  of  these  ideals  by  the  adoption  of  stand- 
ardized methods.  This  principle  is  applicable  not  only  to  the 
shops  but  to  all  phases  of  human  activity. 

Scientific  management  is  more  than  a  system  of  shop  man- 
agement; it  is  akin  to  a  state  of  mind,  a  mental  attitude.  Con- 
sidered in  its  essential  features  scientific  management  represents 
the  use  of  the  trained  imagination  in  industrial  life — a  looking 
forward  rather  than  a  looking  backward — the  doing  of  things 
mentally  before  the  attempt  is  made  to  perform  them  on  the 
physical  plane.  The  office  manager  who  desires  to  rearrange 
•his  office  and  who  cuts  pieces  of  paper  to  the  scale  of  the  furni- 
ture and  shifts  these  around  until  he  has  found  an  arrangement 
which  suits  him  is  practicing  scientific  management,  whereas 
he  who  has  all  the  furniture  moved  around  bodily,  only  to  find 
that  the  original  arrangement  was  best,  is  not.  The  traditional 
plumber  arriving  on  his  job  without  his  tools  represents  the 
antithesis  of  the  scientific  management  idea. 

The  full  significance  of  scientific  management  has,  however, 
yet  to  be  realized  by  the  business  world.  It  is  true  that  every 
executive  more  or  less  unconsciously  applies  the  principles  of 
scientific  management  in  his  business  and  the  success  or  failure 
of  a  business  in  large  measure  depends  upon  the  ability  of  the 
executive  to  foresee  the  results  which  will  follow  the  taking  of 
any  given  course  of  action,  but  outside  of  the  shops  the  applica- 
tion of  these  orinciples  has  been  more  or  less  desultory. 


The  Elements  of  Successful  Operation 

The  successful  operation  of  a  war,  a  ship  or  a  business  is 
dependent  in  large  measure  on: 

1  The   ability  to  plan ;   to   determine   and   adopt  the  best 

methods  to  obtain  the  best  results  from  given  condi- 
tions, and  to  make  accurate  forecasts  of  the  conse- 
cjuences  following  the  adoption  of  a  certain  course  of 
action 

2  The    provision   of   means    for    obtaining   immediate   in- 


133 

formation  .is  to  variations  between  the  actual  results 
and  the  forecast 
3  The  power  of  making  quick  adjustments  in  plans  to  con- 
form to  variations  so  disclosed 

The  above  principles  are  followed  to  some  extent  by  all  suc- 
cessful executives.  The  progressive  treasurer  is  at  all  times 
looking  into  the  future ;  he  has  before  him  a  statement  showing 
his  estimated  resources  and  requirements  for  several  months 
ahead  on  the  basis  of  which  he  negotiates  his  borrowings,  fol- 
lows up  his  collections  and  handles  his  funds.  Each  day,  parallel 
to  the  estimates  is  recorded  actual  information  relative  to  com- 
mitments, sales  collections  and  disbursements  so  that  by  watch- 
ing variations  between  his  estimates  and  the  actual  results  he  can 
adjust  his  financial  policies  to  obtain  the  best  results  from  condi- 
tions. Even  the  government  makes  use  of  forecasts  in  its  crop 
reports,  as  Roger  W.  Babson  states: 

Of  all  statistics  published  by  the  Government  the  most  important  to 
the  merchant  are  crop  reports.  Most  of  the  Government  figures  refer  to 
what  has  happened  in  the  past,  and  many  of  these  figures  are  published 
a  year  or  more  after  the  events  have  happened.  In  the  case  of  the  crops, 
however,  the  Government  actually  forecasts.  Therefore,  all  crop  statistics 
are  especially  valuable  to  manufacturers  and  merchants. 

The  modern,  progressive  sales  manager,  analyzes  his  market 
carefully  to  determine  which  class  of  customer  constitutes 
the  potential  market  for  his  product,  to  ascertain  where  that 
class  is  located  and  to  find  out  what  channels  of  distribution 
are  most  readily  available  for  reaching  them.  For  instance,  the 
sales  manager  of  a  concern  manufacturing  and  marketing  a 
machine  milker  would  collect  very  complete  information  rela- 
tive to  dairy  farmers  in  the  various  districts,  giving  particular 
attention  to  those  farmers  who  had  a  sufficiently  large  number 
of  cows  to  render  the  introduction  of  milking  machines  a  good 
investment,  and  based  upon  this  analysis  would  direct  the  activi- 
ties of  his  selling  organization  so  that  the  returns  therefrom 
will  bear  the  greatest  ratio  to  the  effort  expended. 

On  the  basis  of  the  analysis  would  be  set  the  salesmen's 
standards  or  quotas.  Under  this  method,  the  salesman,  instead 
of  having  a  vague  and  general  idea  of  doing  his  best,  is  provided 
with  a  definite  standard  of  accomplishment  based  upon  carefully 
worked  out  possibilities. 

In  the  early  days,  before  salesmanship  had  developed,  each 
salesman  was  left  to  work  out  his  own  salvation — to  develop 


134 


his  own  methods  of  approach  and  his  own  arguments,  but  the 
scientific  sales  manager  standardizes  these  things  in  a  prepared 
argument,  which  contains  every  selling  point  that  has  been 
developed  in  years  of  experience  and  demonstration. 


The  Experimental  Method 

In  a  selling  campaign  under  which  it  is  planned  to  send  out 
a  large  number  of  letters,  say  250,000,  under  scientific  manage- 
ment methods  a  number  of  tests  would  be  made  of  different 
letters,  perhaps  1000  at  a  time,  these  being  sent  to  representative 
groups,  the  test  letter  from  which  the  largest  number  of  replies 
were  received  being  adopted  as  a  standard  for  the  big  mailing. 
In  this  case  (provided  the  list  used  was  sufficiently  representative 
and  the  number  of  letters  mailed  sufficiently  large)  the  law  of 
averages  will  apply  and  if  15  replies  are  received  from  the  test 
mailing  of  1000  letters  it  may  reasonably  be  expected  that  the 
result  of  the  mailing  of  250,000  letters  will  be  in  the  neighbor- 
hood of  3750.  Under  the  hit-or-miss  method  the  letter  sent  out 
in  the  big  mail  might  not  pull  at  all,  a  fact  which  could  have 
been  ascertained  at  small  expense  by  using  the  test  method. 

The  modern  purchasing  agent  more  or  less  unconsciously 
applies  the  principles  of  scientific  management.  Instead  of  buy- 
ing coal  by  the  ton,  he  purchases  fuel  according  to  heat  units.  In- 
stead of  buying  any  kind  of  belting,  or  the  cheapest,  he  purchases 
this  according  to  specifications  drawn  up  after  careful  tests. 
Steel  is  purchased  by  analysis.  The  modern  purchasing  agent 
is  as  well  posted  as  to  the  sources  of  supply  and  the  cost  of 
production  of  his  major  items  of  purchase  as  the  modern  sales 
manager  is  as  to  the  field  of  distribution  and  the  cost  of  market- 
ing his  own  product. 

The  efforts  which  are  made  by  the  treasurer,  the  sales  man- 
ager and  the  purchasing  agent  to  predetermine  results  are  an 
indication  of  the  tendency  of  business  to  look  ahead,  of  the 
change  of  viewpoint  of  the  entrepreneur  from  retrospection  to 
prospection.  The  benefits  which  should  be  derived  from  these 
efforts  are  greatly  curtailed,  however,  owing  to  the  absence  of 
centralization  and  coordination. 

Strictly  speaking,  there  is  no  such  thing  as  an  interdepart- 
mental problem;  factors  influencing  the  plans  of  one  department 
of  a  business  must  also  directly  or  indirectly  affect  the  plans 
of  the  other  departments.     The  treasurer's  forecasts  of  collec- 


135 

tions  are  based  upon  the  sales  manager's  estimates  of  sales  and 
anything  which  affects  the  lattcr's  plans  must  also  influence  those 
made  by  the  former.  The  estimates  of  sales  made  by  the  sales 
manager  are  dependent  upon  the  deliveries  which  can  be  made 
by  the  factory  manager  and  accordingly  any  circumstance  which 
affects  the  productive  capacity  in  like  manner  influences  the  plans 
of  the  sales  manager  and  of  the  treasurer. 

There  is  one  department  which  should  be  in  a  position  to 
coordinate  the  efforts  of  all  other  departments,  this  is  the 
accounting — the  one  department  which  in  the  average  business 
has  not  kept  abreast  of  the  general  advance.  When  all  other 
departments  are  looking  into  the  future  the  outlook  of  the 
accounting  department  is  still  confined  to  what  has  happened 
and  its  work  to  the  compilation  of  records  of  past  events. 


The  Two  Problems  of  Operation 

The  operation  of  a  business  is  similar  to  the  navigation  of 
a  ship,  the  two  fundamental  problems  in  navigation  being: 

1  The    determination    of    the    ship's    position    at    a    given 

moment 

2  The   decision   of   the   most   advantageous   course   to   be 

steered  in  order  to  reach  a  given  point 

The  first  of  these  problems  is  that  of  the  accountant,  the 
second  that  of  the  executive.  It  is  along  these  hues  that  the 
true  function  and  destiny  of  the  accountant  of  the  future  lies, 
it  is  his  duty  to  chart  the  course  which  is  laid  down  by  the 
executives  and  to  show  at  all  times  what  the  actual  position 
is  as  compared  therewith. 

In  the  industrial  world  it  is  impossible  to  foresee  with  cer- 
tainty what  the  morrow  will  bring  forth.  As  the  poet  says, 
"The  best-laid  schemes  o'  mice  an'  men  gang  aft  a-gley,"  and 
the  problem  of  business  is  mainly  one  of  adjustment  to  changing 
conditions,  of  maintaining  an  equilibrium  of  opposing  forces. 
The  farther,  however,  we  can  see  ahead  and  the  quicker  we 
can  trim  our  sails  before  the  approaching  storm,  the  more  cer- 
tain we  are  of  reaching  the  hoped  for  haven.  No  general  can 
foresee  with  certainty  what  moves  his  opponent  will  make,  but 
the  more  flexible  his  forces,  the  quicker  he  can  take  advantage 
of  a  false  move  of  the  enemy,  the  greater  the  probability  of 
victory. 


136 

The  fact  that  it  may  be  necessary  to  be  continually  revising 
plans  is  not  an  argument  in  favor  of  not  making  plans,  but 
rather  emphasizes  the  importance  of  making  them.  Every  head 
of  a  business  should  have  before  him  at  all  times  the  chart  of 
the  course  which  he  is  planning  to  take,  and  of  his  position  at 
the  moment  in  relation  thereto. 

The  predetermination  of  results  or  the  setting  of  objectives 
in  the  operation  of  a  business  calls  for: 

1  Estimated  volume  of  sales 

2  Estimated  selling  prices 

3  Estimates  of  costs  and  expenses 

4  Estimated  profits 

Variations  in  any  of  the  first  three  obviously  affect  the  last. 

An  Illustration  of  the  Principle  of  Predetermination 

The  actual  methods  to  be  follov^ed  as  regards  the  prede- 
termination of  results  depend  in  large  measure  on  the  character 
of  the  business.  The  principles  to  be  employed,  however,  can 
be  demonstrated  by  taking  a  simple  illustration  and  following 
it  through;  in  this,  as  in  previous  illustrations,  it  being  under- 
stood that  the  example  taken  is  purely  hypothetical  and  the 
results  shown  far  different  from  what  might  occur  in  actual 
practice. 

The  conditions  existing  in  the  case  taken  as  an  example  are 
assumed  to  be  as  follows: 

The  business  is  that  of  manufacturing  autotrucks,  one  model 
only  being  produced.  It  is  assumed  that  this  is  a  new  venture 
and  conditions  somewhat  uncertain.  It  is  estimated  that  the 
sales  for  the  year  will  be  at  the  rate  of  250  trucks  a  month. 
It  is  also  estimated  that  the  sales  price  which  will  be  realized 
will  be  $1000,  the  cost  (including  all  expenses)  $800  and  the 
net  profit  thus  $200  a  truck.  The  estimated  cost  of  a  truck  is 
made  up  as  follows: 

Material $300.00 

Labor 100.00 

Factory  burden 250.00 

Administrative  expense   50.00 

Selling  expense 100.00 

Total $800.00 


137 

A  summarized  forecast  of  profits  for  the  year  is  made  up  as 
follows : 

Estimated  sales,  3000  trucks  at  $1000  each  $3,000,000 
Estimated  cost,  3000  trucks  at  $800  each.  .  2,400,000 
Estimated  profit,  $200  per  truck 600,000 

This  estimate  expressed  in  chart  form  is  shown  in  Figure  17 
where  separate  lines  are  shown  for  estimates  of  sales,  cost  of 
sales  and  profits.     Actual  results  would  also  be  plotted  on  this 


3,000,000 

2,700,000 
2,400,000 
2,100,000 

1,800,000 

>i> 
1,500,000    o 

o 
1,200,000  " 

900,000 

■  600,000 

300,000- 

0 


Jar 

Feb 

Mar 

-     Apr 

Maij 

June    July     Auc 

.     Sept    Oct 

Nov 

Dec 

/ 

/ 

/ 

/ 

/ 

/ 

^ 

y 

K 

^y 

'^ 

( 

• 

V 

U 

50^ 

V 

r 

A 

/ 

A^ 

/ 

/y 

y 

.^ 

^ 

;  /ne  c 

n^^ 

r7C?/ed 

=>-of'^ 

■ ' 

^ 

y 

— 

-"^ 

Fig.  17. — Method  of  charting  forecast  of  profits. 


chart  so  that  a  comparison  of  these  with  those  of  the  estimates 
would  show  the  extent  to  which  the  business  ship  has  deviated 
from  the  course  laid  down. 

Now  under  the  form  of  accounting  here  illustrated  all  results 
require  to  be  shown  in  relation  to  the  estimates.  It  is  assumed 
that  the  manufacturing  costs  have  been  predetermined  according 
to  the  methods  previously  explained  in  these  articles  and  that 
the  administrative  and  selling  costs,  based  upon  sales  of  250 
trucks  a  month,  have  also  been  carefully  predetermined.  All 
efforts  are  concentrated  toward  the  realization  of  $50,000  a 
month  profit — responsibilities  are  apportioned  between  the  sell- 
ing and  manufacturing  departments,  the  former  to  dispose  of 


138 

250  trucks  a  month  at  a  price  of  $1000  and  at  a  selling  expense 
of  $100  a  truck  and  the  latter  to  deliver  these  trucks  at  a  factory 
cost  of  $650, 

Detailed   statements   showing  the  variations   from   estimates 
for  three  months  are  given  in  Tables  19,  20,  and  21,  the  informa- 


OOO'Oi^ 


qsj 


tion  appearing  on  these  statements  being  charted  on  the  form 
illustrated  in  Figure  18.  All  figures  on  these  statements  are 
expressed  in  relation  to  their  effect  upon  the  estimated  profits, 
the  results  shown  on  the  statements  being  summarized  as  shown 
in  Table  22. 


130 

Table  22.    Increases  or  Decreases  in  Comparison  with  Estimated  Profits 


January 

February 

March 

Total 

Due  to  variations  in  volume  of  sales . 
Due  to  variations  in  price 

*$5,ooo 
*5,ooo 

2,500 

500 

*i,5oo 

*I,250 

*i,500 

$10,000 
*i5,ooo 

*i,ooo 

500 

5,000 

1,000 

1,500 

$20,000 
*i7,50o 

3,000 
1,000 
12,500 
3,500 
8,000 

$25,000 
*37,500 

4,500 
2,000 

Due  to  variations  in  cost  of  sales: 
Cost  of  material 

Labor 

Factorv  burden 

16,000 

Administration  expense 

Selling  expense 

3.000 
8,250 

Total 

*$i  1,250 

$2 ,000 

$30,500 

$21,250 

Asterisk  (*)  denotes  decrease. 


A  consideration  of  the  first  month's  statement  (Table  19) 
will  show  that  the  market  conditions  were  not  properly  prede- 
termined. The  price  of  the  truck  was  too  high  to  meet  com- 
petition and  in  spite  of  the  fact  that  50  trucks  were  sold  at  a 
reduced  price  of  $900  ($100  less  than  the  standard)  the  volume 
of  sales  was  25  trucks  less  than  the  estimate.  This  condition 
resulted  in  a  loss  of  the  $200  profit  on  the  25  trucks  not  sold, 
making  a  total  of  $5000  and  a  loss  of  $100  apiece  on  the  50 
trucks  sold  under  the  estimated  selling  price  totalling  $5000 
more  and  making  a  total  loss,  as  compared  with  estimate,  of 
$10,000.  The  manufacturing  department  managed  to  keep  their 
costs  below  standard  but  owing  to  the  decreased  volume  of  sales 
the  selling  and  administrative  expense  per  truck  was  above 
standard. 

Obviously  a  complete  change  in  selling  policy  was  necessary 
if  the  estimated  profits  were  to  be  realized  and  it  was  decided 
to  reduce  the  price  of  the  trucks  to  $950,  the  effect  of  this  policy 
being  shown  in  the  statements  for  February  and  March.  In 
February,  as  a  result  of  the  change  in  selling  price,  the  number 
of  trucks  sold  was  50  in  excess  of  the  estimate,  which  would 
have  resulted  in  an  increased  profit  over  standard  of  $10,000 
had  the  price  been  maintained.  Owing,  however,  to  the  reduced 
price  there  was  a  corresponding  loss  of  $15,000  making  a  net 
loss,  as  compared  with  estimate,  of  $5000,  but  this  was  more 
than  offset  by  the  decrease  in  factory  burden,  selling,  and  ad- 
ministrative costs  per  truck,  owing  to  the  increased  volume  of 
business  over  standard. 


I40 

In  the  month  of  March  (Table  21)  the  number  of  trucks 
sold  was  100  in  excess  of  standard  which  would  have  resulted 
in  an  increased  profit,  as  compared  with  the  estimate,  of  $20,000 
had  the  price  of  $1000  per  truck  been  maintained.  The  reduc- 
tion in  price  of  $50  resulted  in  a  decrease  in  profits  of  $17,500, 
so  that  at  this  point  the  profit  due  to  increased  sales  more  than 
ofifset  the  loss  due  to  decreased  selling  price,  wath  the  result  that 
the  large  savings  in  factory  burden,  sales  and  administrative 
expense  due  to  the  increased  production  were  all  velv^et,  the  net 
profits  for  the  month  being  $80,500  or  $30,500  in  excess  of  the 
estimate. 

Obviously,  under  these  conditions  the  original  estimates 
require  revision — instead  of  figuring  on  selling  only  250  trucks 
a  month  the  sales  manager  decides  that  if  he  still  further  reduces 
the  price  to  $900  he  ought  to  sell  400  and  the  factory  manager 
advising  that  he  can  produce  this  number  of  trucks,  the  new 
plans  are  figured  on  this  basis.  It  is  figured  that  the  March 
figures  for  factory  burden,  administrative  and  selling  expense 
can  be  maintained  and  the  revised  forecast  for  the  cost  of  a 
truck  during  the  next  12  months  is  made  up  as  follows: 

Material $300.00 

Labor 100.00 

Factory  burden 187.50 

Administrative 35-00 

Selling   expense    67.50 


$690.00 
These  figures  then  give  a  revised  forecast  of  profits  as  follows 

Revised    estimated    sales,    4800    trucks    at 

$900  each $4,320,000 

Revised    estimated    cost,    4800    trucks    at 

$690  each 3,312,000 


Revised  estimated  profits,  $210  per  truck.  .   $1,008,000 

The  new  forecast  of  revised  figures  is  shown  in  chart  form 
in  Figure  19  and  until  conditions  change  sufficiently  to  render 
it  desirable  to  make  a  further  revised  forecast  the  accountant 
will  show  monthly  the  position  of  the  business  as  regards  costs 


141 


and  profits  in  comparison  with  the  revised  course  as  laid  down 
on  this  chart. 

Apr      Mau     June     Julu      km.    Sept.     Od.     Nov.       Dec     Jdii.      Feb.      Mar,  t 
■ ■-     ■    ■■-      -  -  4,500,000 


4,000,000 
3,500,000 
3,000,000 
2,500,000 
Z,000,000 
1,500,000 
1,000,000 
500,000 
0 


y 

y 

y 

-^ 

^ 

./^ 

y 

^ 

^ 

.A 

^ 
^ 

bj^ 

,/^ 

y^ 

^  ^ 

<r . 

r 

^ 

^ 

X 

Line  0^ 

IsV^ma 

kdProf 

f 

■ — 

J 

^ 

— - 

— 

■ ■ 

Fig.  19. — Chart  showing  revision  of  forecast  of  profits. 


142 


Table  19.     Statement  Showing  Variations  from  Estimated  Profits  During 
THE  Month  of  January 


Increase  or  Decrease  in 

Profits  as  Compared 

with  Estimate 

Increase 

Decrease 

Estimated  sales  of  trucks  for  month 250 

$2,500.00 
500 . 00 

11,250.00 

Actual  sales 225 

Decrease 25 

Loss  of  standard  profit  on  trucks  not  sold: 

25  trucks  at  $200 .00 

Loss  of  standard  profit  due  to  sales  made  at 
prices  less  than  standard: 

50   trucks   sold   at   $900.00    (loss   of   $100.00 

per  truck) 

Cost  of  sales  in  month        Actual             Standard 

Material $65,000 .  00      $67,500 .00 

Labor 22,000.00        22,500.00 

Factory  burden 57.75o.oo        56,250.00 

Administration 12,50000        11,250.00 

Selling 24,000 .  00        22,500 .  00 

$5,000.00 

5,000.00 

1 ,500 .  00 
1,250.00 
1,500.00 

Total $181,250.00    $180,000.00 

Net  decrease  in  profits  as  compared  with  estimate . 

$14,250.00 

$14,250.00 

Summary  Statement  of  Estimated  and  Actual  Profits 


- 

Estimate 

Actual 

Net  sales 

$250,000.00 
200,000 .  00 

$220,000.00 

Cost  of  sales ... 

181,250.00 

Profit ,_. 

$50,000 .  00 

$38,7so.oo 

Net  decrease  as  above , 

11,250.00 

$50,000 .  00 

$50,000.00 

143 


Table  20.     St.\tement  Showing  Vari.\tions  from  Estimated  Profits  During 
THE  Month  of  February 


Increase  or  Decrease  in 

Profits  as  Compared 

with  Estimate 

Increase 

Decrease 

Estimated  sales  of  trucks  for  month 250 

$10,000.00 

$500.00 
5,000.00 
1 ,000 .  00 
1,500.00 

Actual  sales 300 

Increase 50 

Increased   standard   profit   on   trucks   sold   in 
excess  of  estimate: 

50  trucks  at  $200 .00 

Loss  of  standard  profit  due  to  sales  made  at 
prices  less  than  standard: 

300  trucks  sold  at  $950.00  (loss  of  $50.00 

per  truck) 

Cost  of  sales  in  month     Actual            Standard 

Material $91,000.00      $90,000.00 

Labor 29,500.00        30,000.00 

Factory  burden 70,000.00        75,000.00 

Administration 14,000.00        15,000.00 

Selling 28,500.00        30,000.00 

$15,000.00 
1 ,000 .  00 

Total $233,000.00    $240,000.00 

Net  increase  in  profits  as  compared  with  estimate .  .  . 

2,000.00 

$18,000.00 

$18,000.00 

Summary  Statement  of  Estimated  and  Actual  Profits 


Estimate 

Actual 

Net  sales 

$250,000.00 
200,000 .  00 

$285,000.60 
233,000 .  00 

Cost  of  sales.  .  .                         

Profit 

$50,000 .  00 . 
2,000.00 

.$52,000.00 

Net  increase  as  above 

$52,000.00 

$52,000.00 

144 


Table  21. 


Statement  Showing  Variations  from  Estimated  Profits  During 
THE  Month  of  March 


Increase  or  Decrease  in 

Profits  as  Compared 

with  Estimate 

Increase 

Decrease 

Estimated  sales  of  trucks  for  month 250 

$20,000 .  00 

3,000.00 
1 ,000 . 00 
12,500.00 
3,500.00 
8,000.00 

Actual  sales 350 

Increase 100 

Increased   standard  profit  on  trucks  sold  in 
excess  of  estimate: 

100  trucks  at  $200 .00 

Loss  of  standard  profit  due  to  sales  made  at 
prices  less  than  standard : 

350  trucks  sold  at  $950.00  (loss  of  $50.00 

a  truck) 

Cost  of  sales  in  month:        Actual             Standard 

Material $102,000.00    $105,000.00 

Labor 34,000 .  00       35,000 .  00 

Factory  burden 75,000.00       87,500.00 

Administration 14,000.00        17,500  00 

$17,500.00 

SelHng 27,000 .  00       35,000 .  00 

Total $252,000 .  00   $280,000 .  00 

Net  increase  in  profits 

30,500.00 

$48,000 .  00 

$48,000.00 

Summary  Statement  of  Estimated  and  Actual  Profits 

Estimate 

Actual 

Net  sales  . . . 

$250,000.00 
200,000 .  00 

$332,500.00 
252,000.00 

Cost  of  sales.    

Profit   . .    . . 

$50,000 .  00 
30,500.00 

$80,500.00 

Net  increase  as  above 

$80,500 .  00 

$80,500 .  00 

Chapter  VIII 
COST   ACCOUNTING    AND    THE    SALES    MANAGER 

AS  defective  threads  running  through  a  piece  of  cloth  render 
the  whole  imperfect,  so  the  whole  fabric  of  a  business 
is  weakened  by  inefficient  methods  of  cost  accounting.  Success 
in  business  is  the  result  of  exercising  sound  judgment  based 
upon  accurate  knowledge  of  conditions,  and  if  the  executive  is 
not  furnished  with  reliable  and  adequate  information  relative 
to  his  cost  of  manufacture  and  of  distribution  he  is  in  the 
predicament  of  the  master  of  a  ship  without  the  means  of 
determining  his  position.  When  consideration  is  given  to  the 
fact  that  the  majority  of  business  concerns  are  operating  with- 
out adequate  information  relative  to  their  conditions  and  only 
determine  their  true  position  at  the  time  of  the  annual  inventory, 
it  is  not  surprising  that  so  many  firms  are  wrecked  but  rather 
that  so  many  inefficiently  equipped  business  vessels  do  arrive 
at  the  fair  haven  of  satisfactory  profits. 

In  the  shortcomings  of  its  competitors  lies  the  salvation  of 
the  average  business ;  with  one  competitor  a  strong  selling  force 
is  handicapped  by  an  inferior  product,  with  another,  factory 
costs  are  excessive,  with  a  third  costs  of  distribution  are  extra- 
ordinarily high,  and  so  on,  with  the  result  that  a  business  may 
meet  with  a  fair  share  of  success  despite  numerous  defects  in 
its  methods  so  long  as  the  business  as  a  whole  is  not  operated 
very  much  less  efficiently  than  that  of  its  competitors. 

Generally  speaking,  the  greatest  handicap  to  efficient  business 
operation  is  that  of  incomplete,  inadequate  and  inaccurate  in- 
formation relative  to  costs  and  profits,  the  average  sales  manager 
basing  his  selling  prices  very  often  on  the  quotations  of  com- 
petitors equally  uninformed  as  to  the  cost  of  manufacturing 
and  doing  business,  so  that  the  direction  of  sales  activities  is 
largely  a  case  of  the  blind  leading  the  blind. 

So  long  as  all  of  the  competitors  of  a  business  are  equally 
in  the  dark  as  regards  costs,  the  handicap  resulting  from  this 
condition  is  more  or  less  uniform,  but  the  situation  is  entirely 
changed  when  some  more  progressive  competitor  energetically 

145 


146 

and  systematically  undertakes  the  introduction  of  reliable  cost 
methods  and  instead  of  working  partly  by  intuition,  partly  by 
guesswork  and  partly  on  incomplete  and  inaccurate  information, 
handles  his  business  on  the  basis  of  accurate  and  complete  cost 
data.  Under  these  conditions,  all  other  things  being  equal,  he 
cannot  fail  to  outstrip  his  less  efficient  competitors. 

Business  is  largely  conducted  according  to  the  law  of 
averages ;  owing  to  the  general  absence  of  adequate  data  in  many 
industries  the  current  prices  for  various  products  carry  widely 
fluctuating  rates  of  profit,  the  average  profits  representing  the 
mean  between  excessive  profits  for  some  articles  or  lines  and 
inadequate  profits,  and  in  some  cases  losses,  in  other  articles 
or  lines.  The  author  knows  of  several  instances  where  advantage 
has  been  taken  of  this  condition  and  owing  to  close  co5peration 
between  the  sales  manager  and  an  able  comptroller  the  selling 
policy  has  been  successfully  adopted  of  as  far  as  possible  taking 
the  business  on  which  the  large  profits  accrue  and  leaving  to 
competitors  that  business  which  at  current  rates  must  either  be 
handled  at  a  small  margin  of  profit  or  at  a  loss. 


Careless  Figuring  Brings  Loss 

Printers  are  notorious  for  careless  figuring  of  costs  and  the 
author  calls  to  mind  one  case  where  owing  to  the  defective 
cost  methods  employed  by  a  printer  a  large  proportion  of  his 
business  was  accepted  at  a  loss.  In  this  case  there  were  two 
printers  in  competition,  one  of  whom  figured  his  costs  carelessly 
and  apparently  relied  upon  the  law  of  averages  and  that  losses 
due  to  under-figuring  some  items  on  a  quotation  would  be  offset 
by  overfiguring  of  others.  The  other  printer  had  a  reliable  cost 
system  and  based  his  quotations  on  a  reasonable  percentage  of 
profit  over  cost.  Comparisons  between  the  bids  of  these  two 
printers  would  invariably  show  that  the  printer  who  did  not 
figure  his  costs  accurately  cjuoted  prices  which  must  have  been 
under  cost  and  this  was  naturally  the  business  he  most  often 
received,  with  the  result  that  the  work  he  was  doing  for  his 
largest  custorner  was  handled  at  a  dead  loss. 

In  many  cases  the  information  furnished  the  sales  manager 
by  the  cost  department  is  worse  than  no  information  at  all,  for 
not  realizing  how  incorrect  it  is  the  sales  manager  is  apt  to 
place  an  entirely  unwarranted  confidence  in  it  to  the  consequent 
detriment  of  the  profit  and  loss  account.     This  is  particularly 


147 

so  in  those  cases  where  incomplete  systems  of  cost  accounting 
are  followed,  where  the  costs  are  not  controlled  by  the  general 
accounts,  and  where  the  usual  question  at  the  end  oi  the  year 
is,  "Where  have  our  profits  gone?"  for  according  to  the  costs 
with  which  the  sales  department  was  furnished  it  ap[)earcd  that 
there  was  an  ample  margin  of  profit  on  the  orders  accepted. 
There  is  something  rather  pathetic  in  the  wild  search  which  is 
so  often  made  at  the  end  of  the  year  for  some  large  item,  which 
supposedly  must  have  been  left  out  of  the  inventory,  to  account 
for  the  showing  being  so  far  below  what  was  anticipated. 


The  Texdexcy  to  "Shade"  Costs 

In  a  business  where  costs  are  compiled  more  or  less  hap- 
hazardly there  is  always  a  tendency  to  shade  costs.  It  not  being 
generally  feasible  to  verify  the  accuracy  of  the  information 
submitted  and  the  cost  accountant  having  learned  that  a  cost 
which  may  exceed  the  price  quoted  by  a  competitor  is  received 
with  marked  disfavor  by  the  sales  manager  often  follows  the 
lines  of  least  resistance  and  obtains  a  temporary  popularity,  at 
least,  by  submitting  a  cost  more  in  accord  with  what  the  sales 
manager  thinks  it  should  be  than  in  accordance  with  actual  facts. 
This  tendency,  however,  is  very  promptly  controlled  when  the 
sales  manager  is  furnished  with  monthly  statements  showing  the 
actual  profits  realized  and  where  any  marked  disparity  between 
the  profits  based  upon  the  cost  department's  estimates  and  those 
actually  realized  will  call  for  summary  investigation. 

Though,  as  stated  previously,  there  are  many  concerns  that 
do  not  determine  their  actual  position  except  at  the  time  of  the 
annual  inventory,  there  are  others  who  have  advanced  a  step 
toward  better  methods  and  who  are  able  to  determine  approxi- 
mately how  they  stand  from  month  to  month.  As  an  instance 
of  this  may  be  cited  the  case  of  a  concern  manufacturing  a 
multiplicity  of  metal  articles  selling  at  a  wide  range  of  prices 
per  pound,  where  the  profits  are  figured  monthly  by  comparing 
the  average  cost  per  pound  of  the  goods  manufactured  with  the 
average  price  per  pound  realized.  Under  this  method  which  has 
been  followed  for  many  years  there  has  never  been  any  wide 
variance  between  the  profits  shown  by  totalling  the  twelve 
monthly  statements  and  those  based  upon  the  annual  stock  tak- 
ing, and  it  was  claimed  by  the  treasurer  that  the  results  obtained 
were  sufficient  to  meet  all  reasonable  requirements. 


Information  as  to  Profits  Realized 

It  is,  of  course,  admitted  that  the  obtaining  of  information 
showing  the  monthly  profits  of  a  business  in  total  is  a  marked 
step  in  advance  as  compared  with  obtaining  this  information 
solely  at  the  annual  taking  of  the  inventory ;  but  even  this  falls 
far  short  of  meeting  the  needs  of  the  sales  manager.  To  enable 
him  to  properly  direct  the  activities  of  the  selling  force  it  is 
necessary  that  he  should  be  provided  with  the  most  complete 
information  relative  to  costs  and  profits  and  this  should  include 
information  as  to  the  profits  realized: 

1  On  different  classes  of  product 

2  In  various  territories 

3  By  salesmen  and  branch  offices 

4  On  sales  to  the  various  classes  of  customers 

In  addition,  the  system  should  provide  for  furnishing  any 
combination  of  this  information,  as  for  instance,  profits  realized 
in  the  various  territories  by  lines  of  product,  or  profits  realized 
on  sales  to  the  various  classes  of  customers  by  lines  of  product, 
etc. 

It  is  also  desirable  that  the  sales  manager  be  furnished  with 
approximate  information  under  the  above  heads  as  regards 
estimated  profits  on  unfilled  orders,  as  it  by  no  means  follows 
that  the  profits  realized  on  this  month's  shipments  are  indicative 
of  what  the  profits  will  be  on  the  orders  accepted  this  month. 

In  recent  years  the  punched  card  system  of  obtaining  sales 
statistical  data  has  become  very  generally  adopted,  the  general 
principles  underlying  the  use  of  punched  cards  and  mechanical 
sorting  and  tabulating  equipment  having  been  previously  ex- 
plained (see  Chapter  IV)  and  therefore  not  requiring  to  be 
dealt  with  further  here.  In  using  punched  cards  for  obtaining 
sales  statistical  data  provision  is  generally  made  for  the  follow- 
ing information  being  punched  on  the  cards: 

1  Date  of  sale 

2  Invoice  number 

3  Territory 

4  Salesman's  number 

5  Customer's  number 

6  Ledger  section 

7  Class  of  customer 

.  8  Line  of  goods  sold 
9  Amount  of  sale 
lO  Amount  of  freigfht 


149 

The  number  of  cards  requiring  to  be  punched  for  each  sales 
invoice  depends  upon  whether  a  division  is  recjuired  to  be  made 
of  the  sales  by  lines  and  if  this  information  is  called  for  it  is 
obviously  necessary  to  punch  as  many  cards  for  an  invoice  as 
there  are  different  lines  included  thereon.  If  the  segregation 
of  sales  data  by  lines  is  not  required  only  one  card  will  be  needed 
for  recording  each  invoice. 

It  is  sometimes  considered  desirable  to  introduce  an  added 
refinement  by  extending  the  use  of  the  statistical  cards  to  furnish 
information  relative  to  the  shipment  of  individual  articles,  this 
plan  rendering  it  necessary  to  punch  the  article  number  and  the 
number  shipped  on  the  statistical  card.  By  sorting  the  cards 
daily  by  article  numbers  and  tabulating  for  the  number  of  each 
article  shipped  the  necessary  information  for  posting  shipments 
to  the  stock  ledgers  is  obtained.  In  addition  this  plan  enables 
an  intensive  analysis  to  be  made,  when  desired,  of  any  cus- 
tomer's purchases,  but  in  general  it  may  be  stated  that  in  most 
cases  this  is  a  game  not  worth  the  candle,  the  advantages  to 
be  gained  from  punching  a  card  for  each  item  on  the  invoice 
not  being  sufficiently  great  to  compensate  for  the  added  expense 
involved. 

The  punching  of  the  customer's  number  on  the  sales  card 
renders  it  possible  to  obtain  a  complete  analysis  of  the  sales 
to  each  customer  monthly  by  lines  and  a  record  of  this  character 
is  generally  found  to  be  of  considerable  value  to  the  sales  man- 
ager in  supervising  the  w^ork  of  the  selling  force.  When  the 
customer's  number  is  punched  on  sales  cards  it  is  generally  found 
advisable  to  extend  the  use  of  this  number  to  all  records  of  the 
customer.  Under  this  plan  as  soon  as  an  account  is  opened 
with  a  new  customer  he  is  assigned  the  number  following  that 
last  allotted  which  number  he  retains  indefinitely.  All  corre- 
spondence with  the  customer  is  filed  under  this  number  and  in 
addition  all  his  orders  carry  this  number,  the  customer's  order 
number  being  a  combination  of  his  file  number  and  his  order 
sequence  number,  this  being  the  consecutive  number  of  the  order 
received  from  the  customer.  For  instance  assume  that  the  num- 
ber assigned  to  a  customer  is  91 14,  then  the  first  order  received 
from  him  will  be  9114-1,  the  second  91 14-2  and  so  on.  In 
many  cases  where  orders  are  likely  to  be  split-up,  some  of  the 
goods  being  shipped  from  stock  and  others  being  made  up  to 
special  order,  it  is  desirable  for  the  items  on  the  order  also  to 
be  numbered  so  that  if  the  first  order  from  customer  number  91 14 
comprised    four    items    these    would    be   numbered    respectively 


ISO 

9114-1-1,  9114-1-2,  9114-1-3,  and  9114-1-4.  In  this  case  the 
whole  order  would  be  referred  to  as  9114-1,  the  item  numbers 
only  being  used  when  it  was  desired  to  refer  specifically  to  an 
item  on  the  order. 

By  sorting  sales  statistical  cards  into  the  desired  groups  and 
then  tabulating  them  it  is  possible  to  obtain  an  immense  variety 
of  sales  statistical  information  such  as  the  following: 

1  Sales  to  each  ledger  section  (for  sales  ledger  balancing) 

2  Sales  by  lines 

3  Sales  made  in  each  territory  subdivided: 

(a)  By  lines 

(b)  By  class  of  customer 

(c)  By  lines  to  each  class  of  customer 

4  Sales  to  individual  customers  either  in  total  or  by  lines 

5  Sales  made  by  each  salesman  either  in  total  or  by  lines 

6  Sales  made  by  each  branch  office  or  divided: 

(a)  By  lines 

(b)  By  classes  of  customer 

(c)  By  lines  to  each  class  of  customer 

In  brief,  it  is  possible  by  the  use  of  sorting  and  tabulating 
machines  to  obtain  any  desired  combination  of  the  information 
punched  on  the  sales  statistical  cards. 

There  is  no  questioning  the  great  value  in  most  cases  of  the 
class  of  sales  statistical  data  just  described.  With  this  informa- 
tion focussed  in  a  properly  designed  system  of  statistical  reports 
and  graphic  charts  the  sales  manager  is  given  immense  assistance 
in  his  work  of  supervising  the  activities  of  the  selling  force,  and 
when  such  a  system  is  first  installed  his  delight  in  receiving 
this  potent  aid  to  the  handling  of  his  work  is  so  great  that  he 
is  apt  to  overlook  the  fact  that  desirable  as  are  the  data  with 
which  he  is  furnished  the  most  important  information  of  all 
is  absent.  Business  is  not  conducted  for  the  purpose  of  making 
gross  sales,  but  with  the  object  of  making  profits,  yet  there  is 
probably  not  one  sales  statistical  system  in  a  hundred,  nay  in 
a  thousand,  which  in  addition  to  furnishing  all  of  the  informa- 
tion mentioned  above  as  to  the  sales  can  also  give  it  as  regards 
profits.  What  is  the  inevitable  result?  The  onlv  complete  in- 
formation available  being  that  as  regards  the  volume  of  sales 
the  efforts  of  the  whole  sales  department  are  directed  primarily 
to  volume  of  sales  rather  than  to  profit.  Salesmen  are  paid 
commissions  on  their  gross  sales,  not  on  the  profit  they  make, 
with  the  result  that  the  most  highly  regarded  salesmen  is  often 


151 

the  one  who  by  shacUng  prices  piles  up  the  greatest  volume  of 
business.  The  sales  manager  having  nothing  to  guide  him  other 
than  the  figure  of  gross  sales  is  naturally  influenced  by  volume 
more  than  an\thing  else  and  this  attitude  permeates  down  the 
line.  Even  when  prices  are  determined  by  the  head  office  it  is 
often  the  case  that  dift'erent  discounts  are  made  to  the  difi^erent 
classes  of  customers,  the  larger  buyers  receiving  the  most  favor- 
able discounts,  so  that  with  information  as  to  profits  made  by 
the  individual  salesman  not  being  available  he  naturally  follows 
the  line  of  least  resistance  and  neglects  the  smaller  but  relatively 
profitable  customer  in  order  to  swell  his  volume  of  sales  by 
selling  to  the  large  but  relatively  least  profitable  customer.  The 
author  calls  to  mind  one  case  where  he  introduced  a  system  of 
cost  accounting  which  furnished  information  as  to  the  profits 
realized  bv  each  salesman,  with  the  result  that  before  very  long 
the  salesmen  materially  modified  their  views  and  tactics,  as  they 
found  that  it  was  more  profitable  for  themselves  and  their  com- 
pany to  give  much  more  attention  than  formerly  to  the  moderate 
purchaser  whose  business  in  reality  was  the  most  profitable. 

The  limitation  of  the  scope  of  sales  statistics  is  in  most  cases 
due  to  the  inefficient  methods  of  cost  accounting  employed,  for 
under  the  detailed  cost  methods  followed,  when  the  sales  items 
are  at  all  numerous  the  expense  involved  in  obtaining  the  cost 
of  sales  would  be  excessive  and  under  the  cost  plan  usually 
followed  where  costs  are  only  determined  at  the  close  of  the 
month  it  is  necessary  to  wait  until  after  the  compilation  of  the 
cost  figures  for  the  month  before  the  costs  on  the  individual 
sales  can  be  figured. 

It  is  distinctly  remarkable  how  little  valuable  information  is 
furnished  the  average  sales  manager  even  in  those  concerns 
where  there  is  a  more  or  less  elaborate  cost  system  and  where 
numerous  cost  clerks  are  employed.  In  the  case  of  a  company 
whose  product  was  sold  on  an  f.  o.  b.  Pittsburgh  basis  and  where 
the  freight  item  was  a  factor  of  great  importance,  it  was  not 
possible  in  spite  of  the  highly  detailed  cost  accounting  system 
in  force  to  determine  whether  the  business  done  in  territories 
where  the  company  was  not  reimbursed  for  freight  outlays  was 
being  handled  at  a  profit  or  otherwise. 

Fixing  Responsibility 

The  average  accounting  system  does  not  distinguish  between 
profits  due  to  the  efforts  of  the  sales  department  and  those  result- 


152 

ing  from  economies  effected  by  the  manufacturing  division,  with 
the  result  that  a  poor  showing  is  generally  attributed  by  one 
division  to  the  shortcomings  of  the  other.  Perhaps  one  of  the 
most  valuable  features  of  the  methods  of  cost  accounting 
described  in  this  volume  may  be  said  to  be  the  facility  with 
which  a  clear  line  of  demarcation  can  be  drawn  between  the 
operating  and  sales  divisions  so  that  responsibility  for  a  poor 
showing  or  credit  for  a  good  one  can  be  directed  to  the  division 
responsible. 

Comparatively  little  attention  has  been  given  by  cost  account- 
ants generally  to  analyzing  the  costs  of  selling  and  distribution, 
and  when  the  elaborate  methods  which  are  often  employed  in 
the  compilation  of  labor  costs  are  considered  and  the  fact  that 
these  costs  often  total  to  far  less  than  the  costs  of  selling  and 
distribution  the  scant  attention  given  the  latter  would  seem  to 
indicate  the  lack  of  a  sense  of  relative  values.  There  would 
seem  to  be  little  question  that  greater  possibilities  for  economies 
exist  In  the  field  of  sales  expense  than  in  that  of  factory  labor 
and  the  compilation  of  adequate  data  relative  to  the  cost  of 
the  former  is  the  first  step  toward  the  effecting  of  economies 
in  this  direction.  No  system  of  accounting  can  be  considered 
complete  which  does  not  provide  for  the  preparation  of  separate 
profit  and  loss  accounts  for  each  salesman,  these  accounts  show- 
ing on  the  one  side  the  salary,  commission,  and  expenses  of  the 
salesman  and  on  the  other  the  gross  profits  realized  from  the 
sales  made  by  him.  The  objective  of  the  salesman  under  these 
conditions  will  be  the  earning  of  net  profits  and  not  merely 
volume  of  sales. 

So  far  as  the  author  is  aware  no  method  of  accounting  has 
yet  been  developed  other  than  that  described  in  this  volume  by 
which  the  complete  system  of  sales  statistics  enumerated  earlier 
in  this  chapter  can  be  obtained  economically  and  with  promptitude 
when  the  product  manufactured  is  of  diverse  character  and  of 
extensive  variety.  Under  the  usual  detailed  methods  of  cost 
accounting  where  the  line  of  articles  manufactured  may  total 
several  thousands  it  would  be  practically  an  Impossibility  to 
obtain  prompt  and  accurate  distributions  of  profit  by  salesmen, 
territories,  etc.,  even  if  the  cost  of  this,  which  would  be  great, 
were  not  regarded  as  a  deterrent.  By  the  use  of  standard  or 
specification  costs,  however,  such  information  can  be  obtained 
with  facility  and  economy. 


153 

Figuring  the  Cost  of  Sales 

One  of  the  difficult  cost  accounting  problems  to  be  solved 
in  a  business  where  a  multiplicity  of  product  is  manufactured 
is  that  of  providing  the  means  for  ascertaining  the  cost  of  the 
goods  sold,  which  process  is  obviously  a  prerequisite  to  the  figur- 
ing of  the  profit  or  loss  realized  on  sales.  The  problem  in  this 
respect  is  often  not  so  much  the  determination  of  methods  which 
are  theoretically  correct  but  the  provision  of  means  whereby 
an  immense  number  of  sales  items  can  be  reduced  to  a  cost 
basis  without  demanding  too  great  a  volume  of  clerical  work, 
and  in  the  determination  of  the  best  method  to  apply  to  meet 
any  particular  case  is  one  that  calls  for  the  exercise  of  judgment 
and  ingenuity  on  the  part  of  the  designer  of  the  cost  system. 

In  the  preceding  chapters  various  methods  for  determining 
the  cost  of  sales  were  illustrated — all  of  these  being  based  upon 
the  same  general  idea  of  providing  means  for  reducing  the  goods 
sold  to  a  standard  cost  basis,  the  standard  cost  of  the  goods 
sold  in  turn  being  adjusted  to  the  basis  of  actual  cost  by  the 
use  of  the  ratios  of  actual  to  standard  cost  appearing  on  the 
inventory  controlling  accounts. 

A  simple  illustration  of  the  application  of  this  principle  was 
given  in  Chapter  II  (see  Figure  3)  where  the  standard  cost  of 
10,000 — 33/^4  inch  by  H  inch  hexagon  head  machine  bolts  was 
made  up  as  follows: 

Material $66.60 

Labor i3-i4 

Burden 31 -OS 

Total $1 10.79 

It  was  assumed  in  the  illustration  given  that  the  sales  of 
these  machine  bolts  in  the  month  totalled  2,ocoo,ooo  pieces,  the 
standard  cost  of  these  sales  being  figured  as  follows: 

Standard  Cost 
of  Sales  of 

2,000,000  Bolts 

Material    $13,320.00 

Labor    2,628.00 

Burden    6,210.00 

Total $22,158.00 


154 

The  ratios  of  actual  to  standard  cost  for  material,  labor  and 
burden  were  as  follows: 

Material    107.00  per  cent 

Labor 105.60  per  cent 

Burden 1 13.80  per  cent 

and  applying  these  ratios  to  the  standard  cost  of  the  month's 
shipments,  as  shown  above,  gave  the  following  actual  costs  of 
the  2,000,000  bolts  shipped  during  the  month: 

Actual  Cost  of 
2,000,000 

Bolts  Shipped 

Material $14,252.40 

Labor    2,775.17 

Burden   7,066.98 

Total $24,094.55 

The  amount  realized  from  the  sales  of  the  2,000,000  bolts 
was  $26,000.00  so  that  the  profit  on  sales  was  figured  as  follows: 

Amount  of  sales   $26,000.00 

Cost  of  Sales 24,094.55 

Profit $1,905.45 

In  the  case  just  given  it  was  assumed  that  the  busniess  was 
confined  to  the  manufacture  of  one  item  of  product,  this  com- 
prising a  single  piece  of  metal — a  condition  of  extreme  sim- 
plicity not  often  to  be  met.  The  general  principle  used  in  this 
case,  however,  can  be  successfully  applied  to  meet  the  most 
complex  conditions,  rendering  it  possible  to  obtain  promptly  and 
inexpensively  accurate  information  as  to  the  cost  of  sales  in 
cases  when  the  product  manufactured  runs  into  the  tens  of 
thousands  of  different  articles  and  the  sales  items  in  a  month 
into  the  hundreds  of  thousands.  It  is  under  such  complex  con- 
ditions as  these  where  the  need  for  accurate  information  as  to 
which  lines  are  being  marketed  profitably  and  which  not  is  of 
vital  importance  that  the  average  system  of  cost  accounting  hope- 
lessly breaks  down  and  the  author  claims,  and  he  believes  with 


155 

justice,  that  in  these  highly  complex;  cases  the  desired  results 
cannot  be  obtained  by  the  use  of  the  coninuMily  accepted  methods 
of  cost  accounting  under  which  a  detailed  cost  is  carried  for 
each  item  of  product  manufactured  and  the  individual  sales  items 
figured  at  this  cost.  Theoretically,  such  a  method  will  give 
the  required  information  but  the  volume  of  cost  accounting  in- 
volved is  necessarily  so  great  as  to  render  the  undertaking  one 
of  prohibitive  expense. 


Figuring  the  Cost  of  Sales  of  Complex  Machinery 

In  Chapter  III  (see  Figure  5)  there  was  illustrated  the  ap- 
plication of  the  standard  cost  idea  in  the  determination  of  the 
cost  of  sales  of  machinery  comprising  numerous  parts,  part- 
assemblies  and  main  assemblies  composed  of  many  different 
kinds  of  materials.  In  this  case  the  machine  taken  as  an  example 
is  a  windstacker  for  a  thrashing  machine  and  a  more  elaborate 
classification  is  made  than  the  simple  division  into  material, 
labor  and  burden  used  in  the  illustration  of  machine  bolts.  The 
purpose  of  this  elaboration  of  the  cost  classification  will  be 
obvious  when  it  is  remembered  that  in  the  case  now  being 
considered  it  is  assumed  that  the  manufacturer  is  producing  a 
variety  of  machines  and  that  the  proportions  of  the  different 
classes  of  material  and  labor  in  the  different  kinds  of  machines 
may  vary  considerably — in  one  machine,  for  instance,  50  per 
cent  of  the  material  cost  might  be  for  lumber  whereas  in  another 
case  practically  no  lumber  would  be  used.  Under  such  condi- 
tions if  it  should  happen  that  the  fluctuation  in  the  purchase 
price  of  lumber  varies  materially  from  the  fluctuations  in  the 
price  of  other  materials  it  is  obvious  that  this  fluctuation  in  the 
price  of  lumber  should  be  apportioned  to  the  articles  using  lum- 
ber and  not  spread  over  all  articles,  which  would  be  the  case  if 
one  material  adjustment  factor  were  used.  In  a  similar  manner, 
if  accuracy  were  desired  in  the  cost  of  sales  information,  varia- 
tions in  the  carpenter  shop  labor  and  burden  would  require  to 
be  absorbed  in  the  cost  of  articles  involving  work  in  the  carpenter 
shop. 

As  illustrated  in  Figure  5,  therefore,  the  standard  cost  of  the 
windstacker  is  analyzed  into  main  classes  of  material,  labor  and 
burden,  the  total  standard  cost  of  $61.16  for  this  windstacker 
as  shown  in  Form  C  (jn  Figure  5  being  made  up  as  follows : 


156 

Material 

Lumber $i543 

Galvanized  iron 3.75 

Gray  iron  castings 5.40 

Bar  iron 2.50 

Paint 1.80 

Misc.  material   iO-37 


Total $39.25 

Labor 

Carpenter  shop $3-4i 

Machine  shop    0.86 

Forge  shop 0.23 

Paint  shop   0.80 

Tin  shop   1.14 

Erection  shop    1.75 


Total $8.19 

Burden 

Carpenter 100  per  cent.  .  .  .      $3.41 


Machine 1 50  per  cent .  . 

Forge    125  per  cent.  . 

Paint 125  per  cent.. 

Tin    150  per  cent.  . 

Erection no  per  cent.  . 

General  50  per  cent .  . 


1.29 
0.29 
1. 00 
1.71 

1-93 
4.09 


Total $13-72 


Total  Cost   $61.16 

The  method  of  reducing  the  shipments  of  these  windstackers 
to  a  standard  cost  basis  is  illustrated  on  Form  J  of  Figure  5, 
this  work  being  reduced  to  a  minimum  by  having  the  description 
of  the  machine  and  the  standard  cost  pef  machine  for  each 
class  of  expense  printed  on  the  sheet  by  means  of  a  duplicator, 
the  actual  clerical  work  required  each  month  then  being  limited 
to  posting  the  number  of  machines  shipped  and  multiplying  the 
standard  costs  per  machine  for  each  class  of  expense  by  the 
number  of  machines  shipped — a  speedy  operation  if  a  calculating 
machine  is  used. 

Li  the  illustration  given  in  Form  J  on  Figure  5  tlie  reduction 
of  the  standard  cost  of  the  machines  shipped  to  an  actual  cost 


IS7 

basis  was  made  for  all  the  machines  shipped  in  total  but  the 
figuring  of  this  for  the  individual  machines  would  merely  in- 
volve a  slight  addition  to  the  clerical  work.  For  instance,  it  was 
assumed  that  the  number  of  windstackers  shipped  in  the  month 
totalled  50  and  the  statement  shown  in  Table  22  illustrates  the 
calculations  involved  in  the  determination  of  the  actual  cost 
of  these  windstackers  and  the  profit  realized  on  their  sale.  This 
method  of  figuring  cost  of  sales,  which  the  author  originated  and 
has  introduced  into  numerous  factories,  some  of  which  manu- 
facture several  hundred  different  types  and  sizes  of  machines, 
is  the  only  means  of  which  he  is  aware  by  which  accurate  in- 
formation relative  to  the  cost  of  sales  can  be  obtained  without 
requiring  the  carrying  of  the  immense  number  of  cost  accounts 
demanded  by  the  usual  detailed  cost  methods.  It  may  be  well 
to  state  at  this  time  that  under  the  usual  cost  methods,  there 
is  required  a  separate  account  for  each  part,  part-assembly  and 
main  assembly  and  the  methods  also  involve  the  posting  of  every 
time  ticket,  and  material  requisition  to  an  individual  part  or 
assembly  account  and  the  laborious  figuring  of  the  average  costs 
of  each  part  each  month  so  that  the  part  accounts  may  be 
credited  and  the  assembly  accounts  charged  with  the  cost  of 
the  parts  used  in  the  month's  assembly  operations. 

It  is  probable  that  the  immense  volume  of  clerical  work 
demanded  by  the  usual  detailed  methods  of  cost  accounting  is 
the  main  cause  underlying  the  failure  on  the  part  of  many  manu- 
facturers to  figure  monthly  the  cost  of  the  goods  they  sell.  It 
has  apparenth'  never  occurred  to  many  exponents  of  cost 
accounting,  that  there  is  something  radically  wrong  in  a  theory 
which  assumes  that  the  same  methods  of  cost  accounting  should 
be  applied  to  the  business  of  a  manufacturer  turning  out  thou- 
sands of  identical  machines  in  a  month  as  would  be  desirable 
for  keeping  track  of  the  cost  of  building  a  court  house  or  con- 
structing the  Panama  Canal.  It  would  probably  greatly  surprise 
the  average  reader  if  he  knew  how  small  is  the  percentage  of 
manufacturing  concerns  obtaining  really  complete  and  reliable 
information  as  to  the  profits  realized  on  the  various  articles  they 
manufacture.  As  a  matter  of  fact,  the  failure  of  manufacturers 
to  obtain  this  information  in  the  majority  of  cases  would  seem 
to  be  due  not  so  much  to  a  lack  of  appreciation  of  its  importance 
but  to  a  carefully  arrived  at  decision  that  valuable  as  this  in- 
formation may  be  it  is  doubtful  whether  it  is  worth  the  immense 
amount  of  clerical  expense  which  is  necessary  to  furnish  it  under 
the   methods  of   cost  accounting  commonly   employed.      Quite 


1S8 


Table  22.     Costs  and  Profits  from  Sale  of  50  Windstackers 


Standard 
Cost  of 
I  Wind- 
stacker 


Standard 
Cost  of 

50  Wind- 
stackers 


Ratio 
Actual  to 
Standard 

Cost 


Actual 
Cost  of 
50  Wind- 
stackers 


Materl\l 

Lumber 

Galvanized  iron 

Gray  iron  castings 

Bar  iron 

Paint 

Miscellaneous  material . 

Total 


$771-50 
187.50 
270.00 
125.00 
90.00 
518.50 


115 
102 
108 

lOI 

138 
107 


Labor 

Carpenter  shop. 
Machine  shop . . 
Forge  shop. . . . 

Paint  shop 

Tin  shop 

Erection  shop .  . 


Total . 


$39-25 


$1962.50 


M-41 
0.86 
0.23 
0.80 
1. 14 
1-75 


$170.50 
43-00 
11.50 
40.00 
57.00 
87.50 


109.9 

97-9 

100.8 

107.2 

92.8 

87.1 


$8.19 


$409 ■ 50 


$889.54 
192.38 
293.76 
126.75 
124.65 
557-91 


$2184.99 


$187.38 
42. 10 

11-59 

42.88 
52.90 
76.21 


$413.06 


Burden 

Carpenter  shop. 
Machine  shop.  . 
Forge  shop .... 

Paint  shop 

Tin  shop 

Erection  shop.. 
General 


Total 

Total  Cost. 


«-4i 
1 .29 
0.29 
1 .00 
I. 71 

1-93 
4.09 


$170.50 
64.50 
14-50 
50.00 
85 -50 
96.50 
204 . 50 


114 
106 

99 

112 

96 

8/ 

104 


$13-72 


$686.00 


)i .  16 


$195-73 
68.95 

14-47 
56-45 
82.85 

84-73 


$716.06 


$3314-11 


Amount  Billed 

Gross  Profit 

Selling  and  Administration  Expense. 
Net  Profit 


$3748.00 

433-89 

379-64 

54-25 


159 

often  the  author  has  seen  statements  by  advocates  of  cost 
accounting  in  which  severe  criticism  is  made  of  the  failure  of 
a  hirge  percentage  of  manufacturers  to  maintain  adequate  sys- 
tems of  cost  accounting  under  which  they  can  ascertain  the 
profit  and  loss  realized  each  month  on  the  sales  of  the  different 
lines  manufactured.  In  none  of  these  statements,  however,  does 
the  author  remember  having  seen  any  suggestion  that  the  failure 
of  manufacturers  to  adopt  cost  methods  is  due  to  defects  in 
the  accepted  methods  of  cost  accounting  and  not  merely  to  the 
unprogressiveness  of  manufacturers,  and  his  own  conclusion 
is  that  in  many  cases  the  manufacturer  is  amply  justified  in 
preferring  to  have  a  rough  and  ready  method  of  obtaining  ap- 
proximate costs  rather  than  to  involve  himself  in  the  maintenance 
of  a  cost  department  which  may  give  him  refinements  of  in- 
formation but  which  costs  him  far  more  than  he  can  ever  expect 
to  save  as  a  result  of  its  efforts. 

The  author  does  not  wish  to  be  understood  as  recommending 
that  the  manufacturer  should  endeavor  to  operate  his  business 
without  the  benefit  of  a  cost  accounting  system,  for  the  cost 
of  operating  a  properly  designed  system  of  cost  accounting 
should  be  trifling  compared  with  the  advantages  which  can  be 
obtained  from  intelligent  use  of  the  information  w^iich  such  a 
system  should  furnish,  but  he  does  claim  that  the  elaborate, 
expensive  and  inefficient  methods  of  cost  accounting  with  which 
we  are  all  too  familiar,  which  are  masterly  achievements  in 
combining  the  maximum  of  expense  with  the  minimum  of  essen- 
tial information  are  more  often  a  handicap  to  a  manufacturer 
than  an  aid  to  him  in  the  operation  of  his  business. 


Figuring  the  Cost  of  Sales  for  an  Exceedingly  Varied 

Product 

Probably  the  most  difficult  problem  to  be  solved  in  connection 
with  the  determination  of  the  cost  of  sales  is  in  those  industries 
w^iere  the  product  is  of  immensely  varied  character,  such  as  in 
the  bolt  and  nut  business  or  in  the  silverware,  miscellaneous 
hardware  or  allied  trades  where  the  line  handled  may  run  into 
the  tens  of  thousands  of  items.  In  these  industries  the  problem 
is  complicated  by  the  vast  number  of  individual  sales  items 
which  render  prohibitive  the  expense  of  any  system  of  account- 
ing which  necessitates  the  costing  of  each  sales  item  as  would 
be  necessary  under  the  usual  forms  of  cost  accounting. 


i6o 

The  difficulty  of  the  problem  of  ascertaining  the  cost  of  sales 
in  the  industries  mentioned  has  been  such  as  to  generally  result 
in  no  attempt  being  made  to  figure  monthly  profits  and  losses 
and  in  fact  in  the  great  majority  of  cases  the  profits  are  not 
ascertained  until  the  time  of  the  annual  inventory  and  even 
then  are  only  obtained  in  total,  it  being  impossible  under  the 
usual  forms  of  cost  accounting  to  determine  how  much  money 
was  made  or  lost  on  the  sales  of  individual  lines. 

By  the  use  of  the  methods  of  standard  cost  accounting 
described  in  this  volume  it  is  however  possible  not  only  to  obtain 
monthly  information  as  to  the  profits  and  losses  realized  on  the 
different  lines  sold,  but  to  obtain  important  refinements  of  this 
information — to  know,  for  instance,  the  profits  and  losses  on 
the  sales  of  each  line  by  each  salesman,  in  each  territory  and 
to  the  different  classes  of  customers.  Furthermore,  which  is 
of  vital  importance,  this  information  can  be  obtained  quite  inex- 
pensively and  in  fact  in  the  numerous  cases  where  tabulating 
machines  are  used  for  the  purpose  of  obtaining  sales  statistical 
data  very  little  additional  expense  is  involved  in  extending  the 
scope  of  this  statistical  work  to  embrace  the  work  of  determining 
the  profit  and  loss  on  sales. 

Though  the  "list  less  discount"  method  of  selling  goods  can- 
not perhaps  be  regarded  as  an  entirely  unmixed  blessing  it  is 
without  question  a  valuable  aid  to  the  conduct  of  business. 
Originally  it  was  probably  the  conception  of  some  canny 
merchant  with  whom  necessity  was  the  mother  of  invention  and 
who  having  a  large  supply  of  catalogs  on  hand  at  a  time  when 
he  wished  to  make  a  general  revision  of  prices  scratched  his 
head  to  find  some  way  in  which  he  could  avoid  the  reprinting 
of  his  catalogs  and  conceived  the  brilliant  inspiration  of  having 
a  sticker  inserted  in  the  catalog  on  which  were  printed  the  now 
all  too  familiar  words  "all  prices  in  this  catalog  increased  ten 
per  cent !"  So  useful  a  device  could  hardly  fail  to  become 
widely  adopted,  particularly  in  industries,  such  as  miscellaneous 
hardware,  in  which  the  number  of  items  handled  by  a  merchant 
or  manufacturer  would  run  into  the  thousands  and  the  number 
of  trades  now  making  use  of  lists  and  discounts  is  legion.  It 
would  be  difficult  in  fact  to  conceive  of  business  during  the  last 
few  years  with  the  continuous  upward  trend  in  prices  being 
handled  without  the  list  and  discount  plan  though  it  may  be 
suggested  that  the  inexpensive  revised  discount  sheet  has  not 
been  altogether  a  benefit  to  the  world  at  large  and  that  if  manu- 
facturers had  been  compelled  to  reprint  their  complete  catalogs 


m 


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STATEMENT  OF  PROFITAND  LOSS  BY  LINES 

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*NOT£H  LINEdt  ABOVE  REPRESENTSmYliOLLMATERIALAND  BURDEN  DISTRIBUTION 


{Z)  ABWE  REPRESENTS  REFERENCEnSTANDARDCOST  SHEET  HOT  ILLUSTRATED 


Fig.  20.— Diagram  illustrating  general  principles  involved  in  determining  monthly  profit  and  loss  by  the  use  of  price  lists  combined  with  standard  £ 


i6i 

every  time  they  wished  to  pass  the  burden  alon^  to  the  ultimate 
consumer  they  sometimes  might  have  paused  a  httle  longer 
before  raising  prices. 

The  list  less  discount  idea  has  proven  to  be  remarkably  work- 
able. The  originators  of  some  of  the  standard  price  lists  prob- 
ably never  anticipated  the  condition  which  has  developed  in  some 
industries  where  the  discounts  gradually  declined  to  the /vanish- 
ing point  and  then  retired  in  favor  of  "list  plus  premium"  but 
figuring  prices  from  the  list  when  premiums  are  used  is  a  little 
more  convenient  even  than  figuring  with  discounts  so  that,  like 
the  principle  of  standard  costs,  the  essential  soundness  of  the 
list  and  discount  idea  is  proven  by  the  facility  with  which  it  can 
be  adapted  to  meet  varying  and  unexpected  conditions. 

Many  years  before  he  developed  the  application  of  the 
standard  idea  in  cost  accounting  with  which  this  volume  deals, 
the  author  pondered  on  the  possibilities  of  using  the  standard 
price  lists  as  a  means  of  determining  the  profits  and  losses 
realized  on  sales  of  different  lines,  but  without  the  assistance 
of  standard  costs  he  made  little  headway.  There  were  many 
complications — for  instance  there  was  not  necessarily  any  direct 
relation  between  the  cost  of  different  articles  and  their  list  prices. 
Also  owing  to  improved  methods  of  manufacture  certain  classes 
of  goods  or  certain  sizes  of  goods  could  be  manufactured  more 
cheaply  than  at  the  time  the  list  was  made  while  other  classes 
or  sizes  of  goods  cost  as  much  as  before,  but  the  list  would  not 
be  changed,  the  alteration  in  conditions  being  merely  reflected  in 
the  use  of  different  discounts  for  the  different  classes  of  product 
or  groups  of  sizes.  In  some  industries  different  price  lists  were 
used  for  the  various  classes  of  customers — class  A  customers, 
for  instance  having  a  slightly  lower  price  list  than  class  B,  and 
so  on.  By  the  use  of  standard  costs,  however,  and  the  exercise 
of  a  certain  amount  of  ingenuity  the  author  found  that  it  was 
possible  to  devise  methods  which  would  successfully  meet  alb 
of  these  problems.  Some  of  these  methods  are  described  in  this 
chapter. 

In  Figure  20  is  diagrammed  a  plan  which  illustrates  the 
general  principles  involved  in  the  determination  of  the  cost  of 
goods  sold  and  the  figuring  of  monthly  profits  and  losses  by 
lines  by  the  use  of  price  lists  combined  with  the  application 
of  the  standard  cost  idea.  The  particular  plan  illustrated  is  not 
suitable  to  meet  all  conditions,  even  when  sales  are  made  on 
a  list  less  discount  basis,  but  a  thorough  understanding  of  this 
plan  should  enable  a  skilful  accountant  to  api>ly  the  principles 


l62 

involved  to  meet  other  situations,  and  at  this  point  it  would 
seem  well  to  mention  that  he  who  thinks  he  can  successfully 
apply  any  system  of  accounting  which  he  sees  in  a  h(jok  to 
meet  other  conditions  without  possessing  a  thorough  understand- 
ing of  the  basic  principles  involved  is  headed  for  trouble.  The 
author  realizes  that  in  making  this  statement  he  is  probably 
going  contrary  to  the  views  of  the  engineer  quoted  in  the  first 
chapter  to  the  effect  that  an  expert  on  shop  management  in  a 
short  time  can  learn  all  the  accounting  required  to  enable  him 
to  satisfactorily  design  systems  of  cost  accounting  and  that  the 
employment  of  an  expert  accountant  for  this  purpose  is  an 
absurdity.  Though  an  accountant  by  profession,  the  author 
holds  no  brief  for  expert  accountants  as  designers  of  cost  sys- 
tems and  in  fact  in  this  volume  has  been  frank  to  criticize  the 
accounting  profession  for  its  shortcomings  in  this  field,  never- 
theless he  considers  that  some  of  the  claims  which  are  made 
that  engineers  should  be  masters  as  well  as  jacks  of  all  trades 
are  not  founded  on  common  sense,  nor  are  to  the  benefit  of  the 
engineering  profession,  and  that  the  logical  exponents  of 
accounting  methods  are  those  who  have  devoted  their  lives  to 
this  work.  Accounting  is  deceptively  simple  on  the  surface — 
like  chess  it  is  founded  on  a  few  simple  principles  but  its  com- 
binations are  innumerable  and  there  is  as  much  difference 
between  the  cost  systems  which  an  engineer  with  a  superficial 
smattering  of  accounting  knowledge  and  a  highly  trained 
accountant  would  design  as  there  would  be  between  the  chess 
game  which  would  be  played  by  a  novice  who  merely  knew  the 
moves  and  the  masterpieces  of  Paul  Morphy. 

The  information  which  a  cost  system  should  furnish  should 
form  a  trinity  of  cost  data,  efficiency  data,  and  cost  of  sales 
data.  As  a  general  rule  the  systems  of  cost  accounting  which 
are  designed  by  professional  accountants  while  meeting  at  least 
partially  the  first  and  third  requirements  ignore  the  second  but 
they  at  least  conform  to  established  accounting  principles  and 
furnish  proper  control  of  the  cost  records  through  the  general 
books.  The  cost  systems  as  a  rule  drawn  up  by  engineers  furnish 
considerable  information  relative  to  manufacturing  efficiencies 
but  this  information  is  rarely  brought  to  a  focus  and  neither 
this  nor  the  cost  data  are  properly  controlled  by  the  general  books, 
with  the  result  that  it  is  difficult  to  prove  or  disprove  the  cor- 
rectness of  the  information  submitted,  and  provision  for 
accurately  figuring  cost  of  sales  except  in  the  simplest  situations 
is  generally  entirely  absent.     These  three  major  requirements 


163 

of  a  cost  system  are  not  three  separate  problems  but  merely 
different  angles  of  the  same  problem  and  under  a  properly 
designed  cost  system  the  methods  used  to  satisfy  one  of  the 
requirements  should  enable  the  remaining  two  to  be  also  met. 
A  cost  system  should  be  a  stone  to  kill  three  birds. 

The  absence  of  means  for  determining  the  cost  of  sales  and 
the  profit  and  loss  by  lines  monthly  is  so  common  and  so  serious 
a  defect  in  the  cost  systems  operated  by  manufacturers  of  a 
varied  line  of  product  that  at  the  risk  of  being  tedious  the  author 
considers  it  desirable  to  enter  into  a  somewhat  lengthy  explana- 
tion of  the  plan  diagrammed  in  Figure  20.  In  this  diagram  in 
order  to  facilitate  exposition  the  forms  are  given  distinguishing 
letters  while  the  lines,  depicting  the  various  accounting  operations 
involved  in  the  plan  are  numbered,  the  descriptive  comments  to 
follow  being  arranged  in  the  order  of  the  forms. 

Form  A — Making  Work  in  Process  Account 

At  the  outset  it  should  be  mentioned  that  the  plan  being 
described  was  designed  to  meet  the  requirements  of  a  business 
manufacturing  silver-plated  goods  of  great  variety,  these  goods 
being  carried  on  the  stock  shelves  in  an  unplated  condition  until 
required  for  shipment,  whereupon  the  goods  (known  as  "metal 
stock"  and  so  referred  to  in  the  diagram)  would  be  taken  from 
the  stock  room,  sent  through  the  plating  room,  buffing  and 
other  finishing  operations  performed  on  them  and  the  goods 
then  boxed  and  shipped.  The  operations  up  to  metal  stock  are 
known  as  "making  operations"  and  from  metal  stock  to  ship- 
ment as  "finishing  operations." 

It  was  necessary  for  this  system  to  show  the  profit  and  loss 
realized  monthly  on  the  sales  of  about  twenty  different  lines 
and  a  condition  which  required  to  be  considered  was  that  articles 
in  the  earlier  operations  were  not  identifiable  with  the  line  of 
which  they  would  ultimately  form  part,  blanks  in  various  stages 
being  carried  in  stock  which  could  be  worked  into  articles  belong- 
insf  to  several  lines.  Under  these  circumstances  it  was  decided 
not  to  attempt  to  carry  separate  making  work  in  process  accounts 
by  lines  but  to  carry  all  making  work  in  process  in  one  main 
account,  subdividing  this  into: 

1  Metal 

2  JMaking  labor 

3  Making  burden 

4  Merchandise 

5  Die  service  _ 


164 

The  making  work  in  process  account  is  charged  with  the  cost, 
both  actual  and  standard,  of  all  making  operations  performed 
the  method  employed  following  the  lines  illustrated  in  earlier 
diagrams  (see  Chapter  II — Figure  3,  Chapter  III — Figure  5 
and  Chapter  IV — Figure  7)  this  in  general  resolving  itself  into 
posting  the  actual  cost  of  metal,  labor,  burden,  and  die  service 
to  the  "actual"  column  of  the  respective  divisions  of  the  making 
work  in  process  account  and  figuring  the  production  on  a 
standard  cost  basis  and  posting  the  figures  so  obtained  to  the 
"standard"  columns  under  the  same  divisions  of  the  making 
work  in  process  account. 

The  making  work  in  process  account  is  credited  with  the 
actual  and  standard  cost  of  the  goods  transferred  to  the  metal 
stock  shelves  as  ascertained  from  the  summary  of  metal  stock 
transfers  (Form  C),  the  standard  cost  of  the  goods  transferred 
(divided  as  to  metal,  labor,  burden,  and  die  service)  being 
obtained  by  sorting  and  tabulating  the  metal  stock  transfer  cards 
(Form  H).  The  actual  cost  of  the  goods  transferred  to  metal 
stock  is  obtained  by  applying  the  ratios  of  actual  to  standard 
cost  as  appearing  on  the  making  work  in  process  account  (See 
line  4 — Form  A). 


Form  B — Finishing  Work  in  Process  Account 

This  form  serves  the  same  purpose  as  regards  the  finishing 
operation  as  the  making  work  in  process  does  for  the  making 
operations.  The  credits  to  the  finishing  work  in  process  account 
— representing  the  standard  and  actual  cost  of  the  finishing 
operations  on  work  received  into  finished  stock — are  obtained 
through  the  medium  of  the  summary  of  finished  stock  transfers 
(Form  D),  the  standard  cost  of  the  finishing  operations  being 
obtained  through  the  sorting  and  tabulating  of  the  finished  stock 
transfer  cards  (Form  J),  the  actual  cost  of  the  finishing  opera- 
tions on  the  goods  transferred  to  finished  stock  being  figured 
by  applying  the  ratios  of  actual  to  standard  cost  as  appearing 
on  the  finishing  work  in  process  account.  (See  Line  9 — 
Form  B), 


Form  C — Summary  of  Metal  Stock  Transfers 

The  purpose  of  this  form  was  explained  above  when  dealing 
with  the  making  work  in  process  account.     The  operations  in- 


i65 

volved  in  the  use  of  this  form  as  ilhistrated  by  the  hnes  on  the 
diagram  are  as  follows: 

Line  3 — Sorting  metal  stock  transfer  cards  by  line  number 
and  tabulating  for  standard  metal,  labor,  burden, 
merchandise,  and  die-service.  Posting  totals  so  ob- 
tained in  the  various  standard  columns 

Line  4 — Posting  ratios  of  actual  to  standard  cost  from 
respective  divisions  of  making  work  in  process  account 
(Form  A)   to  head  of  columns 

Lines  5  and  6 — Applying  these  ratios  to  standard  figures  pre- 
viously obtained  (see  line  3,  above)  to  obtain  actual 
cost  of  transfers  to  metal  stock  and  carrying  actual  and 
standard  cost  for  the  line  in  total  to  metal  stock  account 
(Form  E)  Table  23  should  make  the  above  operation 
entirely  clear 

Line  7 — Obtaining  total  actual  and  standard  cost  of  metal 
stock  transfers  for  all  lines  and  posting  to  credit  of 
respective  divisions  of  making  work  in  process  account. 

Form  D — Summary  of  Finished  Stock  Transfers 

This  form  serves  the  same  purpose  for  the  finished  stock 
transfers  that  the  summary  of  metal  stock  transfers  does  for 
the  metal  stock  transfers.  The  operations  involved  in  the  use 
of  this  form  as  illustrated  by  the  lines  on  the  diagram  are  as 
follows : 

Line  8 — Sorting  finished  stock  transfer  cards  (Form  J) 
by  line  number  and  tabulating  for  standard  metal  stock, 
finishing  labor,  finishing  burden,  gold,  and  silver  used 
in  plating,  paper  and  box,  and  merchandise.  Posting 
totals  so  obtained  as  well  as  list  price  of  goods  finished, 
also  tabulated,  to  the  various  standard  columns  of  the 
summary  of  finished  stock  transfers 

Line  9 — Posting  ratios  of  actual  to  standard  cost  from  the 
respective  divisions  of  the  finishing  work  in  process 
account  to  the  head  of  the  columns  of  the  summary  of 
finished  stock  transfers 

Line  10 — Posting  ratio  of  actual  to  standard  cost  of  metal 
stock  for  line  from  metal  stock  account  (Form  E)  to 
metal  stock  per  cent  column  on  summary  of  finished 
stock  transfers 


166 


Line  1 1 — Applying  ratio  obtained  in  previous  operation  to 
standard  cost  of  metal  stock  in  finished  stock  transfers 
to  obtain  actual  cost  and  posting-  both  actual  and 
standard  metal  stock  cost  to  credit  of  metal  stock 
account  (Form  E) 

Lines  12  and  13 — Applying  ratios  of  actual  to  standard  cost 
of  finishing  operations  as  obtained  in  operation  No.  9 
above  to  standard  cost  of  finishing  operations  to  obtain 
actual  cost.  Obtaining  total  of  actual  cost  of  metal 
stock  and  finishing  operations  and  posting  this  total 
together  with  the  list  value  of  the  goods  transferred 
to  finished  stock  to  the  finished  stock  account  (Form  G) 

Line  14 — Obtaining  total  actual  and  standard  cost  of 
finishing  operations  in  finished  stock  transfers  for  all 
lines  and  posting  to  credit  of  various  divisions  of 
finishing  work  in  process  account  (Form  B) 

Table  23.     Metal  Stock  Transfers — Line  5000 


Item 

Standard  Cost 
as  Obtained 

from 
Tabulation 

of 

Metal  Stock 

Transfer 

Cards 

Ratio  of  Actual 

to  Standard 

as  Obtained 

from  Making 

Work  in 

Process 

Account, 

Per  Cent 

Actual  Cost  of 

Metal  Stock 

Transferred 

Obtained  by 

Applying  Ratio 

in  Second 

Column  to 

Figures  in  First 

Column 

Metal 

$1896.00 

1763.00 

2009 . 00 

83.00 

67.00 

82.00 

113. 17 
115.27 
105.18 
104.70 

123 -44 
129. II 

$2146.00 

Making  labor 

2032 . 00 

Making  burden 

Merchandise 

Assorted  die  service 

Pattern  die  service 

2113.00 
87.00 
83.00 

106.00 

Total   standard   and   actual 
cost  carried  to  metal  stock 

account 

1 

$5900 . 00 

$6567.00 

Form  H — Metal  Stock  Transfer  Card 

This  card  represents  the  metal  stockkeeper's  report  of  goods 
received  in  the  metal  stock  room.  The  standard  cost  per  gross 
for  metal,  making  labor,  making  burden,  merchandise,  and  die 
service  would  be  posted  from  the  standard  cost  sheet  for  the 


167 

article  reported  as  received  (Sec  line  2 — Form  H).  This 
standard  cost  sheet  is  not  illustrated  in  the  diagram  but  follows 
along  the  lines  of  the  standard  cost  sheets  shown  in  earlier 
diagrams.  The  extensions  \vould  then  be  made  and  the  cards 
punched. 

At  this  point  it  may  be  well  to  draw  attention  to  the  im- 
portance of  designing  cards  to  be  punched  in  such  a  way  as 
to  render  the  punching  operation  an  entirely  mechanical  one. 
In  the  author's  opinion  a  dual  card  (so  called  because 
both  the  written  and  punched  information  appear  on 
the  same  card)  is  not  properly  designed  if  an  expe- 
rienced punch  operator  who  has  never  seen  the  card  before 
is  not  enabled  to  punch  the  card  at  full  speed  at  the  outset  and 
without  requiring  any  lengthy  preliminary  study  of  the  arrange- 
ment. This  can  be  easily  accomplished  if  the  matter  to  be 
punched  is  arranged  in  the  same  order  as  are  the  different  fields 
and  if  the  "shark's  tooth"  plan  used  in  Forms  H  and  J  is  fol- 
low^ed.  Under  this  plan  by  each  item  of  written  information 
to  be  punched  are  printed  as  many  sharks'  teeth  as  there  are 
punching  fields  provided  on  the  card.  For  instance  on  Form  H 
five  fields  are  provided  for  punching  the  order  number  and 
correspondingly  five  sharks'  teeth  are  printed  in  the  space  pro- 
vided on  the  card  for  writing  the  order  number  so  that  assuming 
for  the  sake  of  argument  that  the  order  number  is  989  the 
operator  knows  immediately  from  the  sharks'  teeth  that  she 
will  have  to  punch  five  fields  and  accordingly  punches  the  order 
number  as  00989. 

It  will  be  noted  that  the  arrangement  of  the  written  data  on 
Forms  H  and  J  proceeds  from  left  to  right  in  conformity  with 
the  arrangement  of  the  punching  fields  with  the  exception  of 
the  date  and  the  line  number  which  are  shown  on  the  extreme 
right.  The  reason  for  this  arrangement  is  that  it  is  not 
convenient  to  crowd  all  of  the  written  matter  to  be  punched 
to  the  left  of  the  card  as  those  who  are  familiar  with  the 
particular  kind  of  punch  used  will  readily  realize.  The  line 
number  was  therefore  placed  to  the  extreme  right  and  was  the 
first  item  to  be  punched  on  the  hand  punch,  the  month  and  day 
in  the  case  being  dealt  with  being  invariably  punched  on  a  gang 
punch. 

Form  J — Finished  Stock  Transfer  Card 

The  operations  involved  in  handling  this  card  are  practically 
identical  to  those  required   for  the  metal  stock  transfer  card. 


i68 

The  standard  costs  per  gross  are  obtained  from  the  standard 
cost  sheets  which  in  addition  to  showing  the  standard  cost  carry 
the  Hst  price  of  the  goods  which  is  also  posted  to  the  finished  stock 
transfer  card. 

Form  E — Metal  Stock  Account 

A  separate  metal  stock  account  is  carried  for  each  line,  the 
main  purpose  of  this  account  being  to  furnish  the  ratio  of  actual 
to  standard  cost  for  figuring  finished  stock  transfers.  In  addi- 
tion, of  course,  the  account  is  of  value  as  indicating  the  amount 
invested  on  the  metal  stock  shelves  in  respect  to  the  different 
lines. 

Form  F — Sales  Card 

This  card  does  not  differ  from  the  usual  form  of  sales  sta- 
tistical card  with  the  exception  that  in  addition  to  the  amount 
billed  provision  is  also  made  for  punching  the  list  value  of  the 
goods  sold.  In  most  cases  this  information  will  be  shown  on 
the  invoice  so  that  the  additional  work  involved  in  making  up 
this  card  is  trifling. 

Form   G — Finished   Stock  Account 

Separate  finished  stock  accounts  are  carried  for  each  line. 
The  main  purpose  of  this  account  is  to  furnish  the  ratio  of 
actual  cost  to  list  for  each  line  so  that  this  ratio  can  be  applied 
to  the  list  value  of  the  goods  sold  in  order  to  obtain  their  cost. 
In  addition  the  account  is  of  value  in  indicating  the  amount  of 
finished  stock  carried  for  each  line. 

Form  K — Statement  of  Profit  and  Loss  by  Lines 

The  information  shown  on  this  statement,  namely  the  profit 
and  loss  made  in  the  month  on  the  sales  of  the  various  lines, 
is  of  course  the  ultimate  purpose  of  the  plan  illustrated.  The 
operations  involved  in  making  up  this  statement  are  as  follows : 

Line  i8 — Sorting  sales  cards  (Form  F)  by  lines  and 
tabulating  for  total  amount  billed 

Line  15 — Posting  list  value  of  sales  as  obtained  from 
tabulation  of  sales  cards  to  credit  of  finished  stock 
account  and  applying  ratio  of  actual  to  list  (as  shown 


169 

on  debit  side  of  account)  to  list  value  of  sales  to  obtain 
actual  cost  of  goods  sold 
Line   17 — Posting  cost  of   sales  as  obtained   in   foregoing 
operation  to  column  so  headed  on  statement  of  profit 
and  loss  by  lines 

The  method  of  obtaining  the  net  profit  by  lines  should  be 
rendered  entirely  clear  by  the  following  statement: 

Statciucnt  of  Profit  and  Loss  on  Sales  of  Line  3000  in  Month 

of  February 

Amount  of  Billing $14,206.00 

List  value  of  goods  billed.  .  .  .   $19,263.00 
Ratio  of  actual  cost  to  list  per  finished  stock 
account  for  line  5000.  .47.9557  per  cent 
Actual  cost  of  goods  billed 9,238.00 

Gross   Profit    $4,968.00 

Less  Selling  and  Administration  Expense       2,841.00 


Net   Profit    $2,127.00 


The  Economy  of  the  Plan  Illustrated  as  Compared  with 
Usual  Method  of  Figuring  Cost  of  Sales 

The  advantage  of  the  plan  illustrated  in  Figure  20  as  com- 
pared with  a  cost  finding  system  under  which  in  order  to 
determine  the  cost  of  goods  sold  by  lines  it  is  necessary  to  carry 
detailed  cost  accounts  for  each  article  made  will  be  apparent 
when  it  is  considered  that  under  such  a  plan  it  would  be  neces- 
sary to  refer  to  the  detailed  cost  records  for  every  item  on  an 
invoice  in  order  to  ascertain  the  last  cost  per  unit  for  the  article 
in  Cjuestion  and  then  to  extend  at  this  cost  figure  the  number 
of  pieces  billed,  a  procedure  ecjuivalent  to  repricing  and  extend- 
ing the  invoice  and  involving  so  much  work  as  to  be  prohibitive 
in  most  cases  on  the  ground  of  expense.  L'^^nder  the  plan  illus- 
trated in  Figure  20  there  is  practically  no  additional  work  in 
connection  with  the  invoice  with  the  exception  possibly  of  to- 
talling the  list  amounts  but  this  in  the  majority  of  cases  will 
already  have  been  done. 


i7o 

Obtaining  Profits   and  Losses   by   Salesmen,   Classes  of 

Customer,  etc. 

Under  the  plan  illustrated  in  Figure  20  any  subdivision  of 
the  profit  and  loss  data  can  be  obtained  with  facility — for  in- 
stance the  procedure  required  to  figure  the  profits  and  losses  on 
the  sales  of  each  line  by  the  different  salesmen  would  be  as 
follows: 

1  Sort  sales  cards  by  salesmen  and  line 

2  Tabulate  list  and  billed  amounts  for  each  line  for  each 

salesman 

3  Apply   ratios   of   actual   to   list    (as   obtained    from   the 

finished  stock  account — Form  C)  to  the  list  value  of 
sales  to  obtain  actual  cost  of  sales  by  lines;  figure  gross 
profits,  pro-rata  selling  and  administration  expense  and 
deduct  same  from  gross  profits  to  obtain  net  profits 

Similar  procedure  would  be  followed  to  figure  the  profits  and 
losses  on  the  sales  of  the  various  lines  to  the  different  classes 
of  customers  or  to  obtain  any  other  combination  of  profit  and 
loss  data.  The  method  followed  in  making  an  analysis  of  profits 
by  salesmen  is  illustrated  in  Table  24. 

Special  Problems  in  Connection  with  Figuring  Cost  of 
Sales  by  List  and  Standard  Cost  Method 

It  will  be  remembered  that  in  the  explanation  of  the  plan 
illustrated  in  Figure  20  it  was  stated  that  the  conditions  to 
meet  which  this  plan  was  designed  did  not  render  it  feasible 
to  carry  the  work  in  process  accounts  by  lines  owing  to  the  fact 
that  the  articles  manufactured  could  not  often  be  identified  with 
the  line  until  several  operations  had  been  performed.  In  many 
cases,  however,  the  goods  will  be  identified  with  the  line  from 
the  outset  and  under  such  conditions  the  work  in  process 
accounts  should  be  carried  by  lines  as  this  method  will  give 
more  accurate  results  and  will  simplify  the  work  in  connection 
with  the  figuring  of  stock  transfers. 

In  some  industries  it  is  the  custom  to  use  different  lists  for 
the  various  classes  of  customers  and  this  condition  presents  no 
particular  difficulty  as  regards  the  figuring  of  the  cost  of  sales 
if  the  relationship  between  the  different  lists  is  uniform  as 
regards  the  different  articles,  as  for  instance  when  the  B  list 
is  uniformly  5  per  cent  higher  than  the  A  list  and  the  C  list 
uniformly  15  per  cent  higher.     On  the  cost  records,  of  course, 


lyi 


4) 

C 

"cl 

O 

1    Selling 
Gross            and             Net 
Profit      Adminis'n      Profit 

1  Expense 

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172 

only  one  list  can  be  used,  which  for  the  sake  of  illustration  may 
be  said  to  be  the  A  list  in  which  case  in  order  to  figure  the  cost 
of  the  sales  made  on  the  B  and  C  lists  by  the  use  of  the  ratio 
of  actual  cost  to  A  list  it  will  be  necessary  to  convert  the  B  and 
C  sales  list  figures  to  the  basis  of  the  A  Hst.  This  is  accom- 
plished by  providing  a  special  field  on  the  sales  card  for  in- 
dicating the  list  used,  the  cards  then  being  sorted  according  to 
list  basis,  the  totals  for  each  list  basis  then  being  adjusted  to 
the  basis  of  the  A  list. 

Taking  the  example  given  above  of  the  B  and  C  lists  being 
uniformly  5  and  15  per  cent  higher  than  the  A  list,  and  assum- 
ing that  the  ratio  of  cost  to  list  was  45  per  cent  and  further 
that  the  tabulation  of  the  sales  cards  was  as  shown  in  Table  25, 

Table  25.     Tabulation  of  Sales  Cards 


List  Basis 


List  Value  of  Sales 
on  Basis  Used 


Billed  Amount 
of  Sales 


A  (base^ 

B 

C 


$5000 
3000 
2000 


$3000 
2000 
1400 


then  the  profit  on  the  sales  made  on  the  different  list  bases  would 
be  determined  as  shown  by  Table  26: 


Table  26.    Profits  on  Sales 


List 
Basis 

List 

of 

Sales 

Factor  to  Convert 

List  Used  to  Basis 

of  A  List 

Base 
List 

Value 

of 
Sales 

Cost  of 

Sales 

45  per 

Cent  of 

Base 

List 

Billed 

Gross 
Profit 

A 
B 
C 

$5000 
3000 
2000 

100  per  cent 

1J5  or  95.238  per  cent.. 
YYZ  °^  ^6  •  95^5  per  cent . 

$5000 
2857 
1739 

$2250 

1286 

783 

$3000 
2000 
1400 

$  750 
714 
617 

$9596 

5^4319 

$6400 

$2081 

173 

Unfortunately  however  the  Hsts  for  the  different  classes  of 
customers  do  not  always  bear  the  same  relationship  as  regards 
the  different  articles — for  instance  in  the  silverware  business  it  by 
no  means  follows  that  if  the  B  list  is  lo  per  cent  higher  for 
tea  spoons  than  the  A  list  that  this  same  relationship  will  apply 
as  regards  dessert  spoons  and  ladles.  Under  such  conditions 
it  is  necessary  to  establish  an  average  relationship  between  the 
different  lists  based  upon  the  proportionate  number  of  the  dif- 
ferent pieces  which  it  is  anticipated  will  be  sold.  This  is  accom- 
plished by  figuring  the  proportionate  quantities  of  the  different 
articles  at  the  various  lists  and  obtaining  the  relationship  between 
these  lists  as  a  whole  in  the  manner  shown  in  Table  27. 


Table  27.     Relation  between  Cost  of  Three  Articles 


Propor- 
tionate 
Number 
Sold, 
Gross 

List  A 

List  B 

List  C 

Article 

Per 
Gross 

Total 

Per 
Gross 

Total 

Per 
Gross 

Total 

Tea  spoon 

Dessert  spoon 

Ladle 

150 

45 
7 

$2.60 
4.60 
730 

$390 . 00 

207.00 

51.10 

$648.10 

100 

$2.85 
5.10 
8.10 

$427 ■ 50 

229 . 50 

56.70 

$713-70 

no.  121 

$3  00 
5  50 
9.00 

$450.00 

247  50 

63.00 

Totals 

$760.50 

Per  cent  of  A  list 

117-343 

To  convert  sales  made  on  the  basis  of  B  and  C  lists  to  the 
basis  of  the  A  list,  sales  on  the  B  list  must  be  multiplied  by 

-  or  0.908092  and  sales  on  the  C  list  must  be  multiplied 


1.10121 
I 


by 


or  0.852202. 


1. 17343 
The  proportionate  numbers  of  the  different  articles  sold  as 

used  above  must  obviously  necessarily  be  in  the  nature  of  an 

estimate    based    upon    past    records    and    present    expectations. 

Periodically  the  actual  proportions  of  the  different  articles  sold 

should  be  ascertained  and  the  sales  statistical  records  adjusted 

to  conform  with  these  actual  results. 


174 


An  Illustration  of  the  Method  of  Ascertaining  Profits 

AND  Losses  Made  by  Individual  Salesmen  in  the 

Agricultural  Implement  Industry 

In  Figure  21  are  illustrated  the  essential  features  of  a  plan 
to  meet  the  exceedingly  complex  conditions  existing  in  the 
agricultural  implement  industry  where  in  addition  to  selling  com- 
plete implements  a  very  large  business  is  carried  on  in  connec- 
tion with  the  sale  of  an  extensive  line  of  repair  parts  running 
into  the  tens  of  thousands  of  separate  articles. 

In  this  diagram  is  illustrated  the  use  of  specification  costs 
in  ascertaining  the  profits  and  losses  made  by  individual  sales- 
men and  the  hypothetical  case  taken  as  an  example  is  that  of 
J.  G.  Jones  of  the  Agricultural  Implement  Company.  Mr.  Jones' 
profit  and  loss  account  for  the  month  of  August,  19 18,  is  shown 
in  Form  K,  from  which  it  will  be  seen  that  there  was  a  gross 
profit  on  his  sales  for  the  month  of  $1 103.21,  which  after  deduct- 
ing his  salary,  commissions  and  expenses,  totalling  $430.72,  left 
a  balance  of  $672.49.  The  proportion  of  general  selling  and 
administrative  expense  chargeable  against  J.  G.  Jones  for  the 
month  (based  on  gross  sales)  amounted  to  $1253.17,  with  the 
result  that  his  account  for  the  month  shows  a  net  loss  of  $580.68. 

In  order  to  demonstrate  the  methods  followed  in  the  com- 
pilation of  this  profit  and  loss  statement  there  are  illustrated 
in  the  diagram  two  invoices,  one  for  a  machine  sale  (Form  A) 
and  the  other  for  a  sale  of  repair  parts  (Form  B),  different 
methods  being  followed  in  figuring  the  gross  profits  on  these 
two  classes  of  business. 

The  machine  invoice  (Form  A)  is  first  coded  for  the  use 
of  the  operator  punching  the  machine  sales  card  (Form  D), 
extracts  from  the  code  book  being  shown  in  Form  C.  The 
machine  sales  card  (Form  D)  is  drawn  up  to  record  the  follow- 
ing information: 

1  Date  of  shipment 

2  Invoice  number 

3  Order  number 

4  Territory 

5  Salesman 

6  Class  of  customer 

7  Branch 

8  Class  of  machine 

9  Number  of  machines  shipped 


VOICE 

?IN6FIELD    ILLINOIS 

>lce  Number  W$95 
r Number  20627 
bxnan  J 6- Jonas 
i+ory  Illinois 
>s  Jobber 


Kic    21  —Diagram  iUustraling  use  of  slandird  cosis  in  ascertaining  profits  and  losses  made  by  individual  salesmen.  [To  /ace  #o«e  //«. 


175 

10  ]\Iachine  number 

1 1  Amount  billed 

12  Freight 

and  is  used  as  a  basis  for  determining  the  profits  and  losses 
realized  on  machine  sales  under  various  arrangements,  as  for 
instance  by: 

Salesmen 
Territories 
Classes  of  customers 
Branches,  etc. 

The  use  of  this  card  in  the  diagram,  however,  is  confined  to 
ascertaining  the  profits  and  losses  realized  by  salesmen,  dividing 
these  into  the  various  classes  of  machines  sold,  as  for  instance: 

Implements 

Wagons 

Carriages 

Grain  drills 

Gas  engines 

Tractors 

Lighting  plants,  etc. 

Reference  to  Forms  A,  C,  and  D  will  show  that  the  following 
information  on  the  machine  invoice  (Form  A)   is  coded: 

Code  Number 

Territory — Illinois i6 

Salesman — J.   G.   Jones 13 

Class  of  customer — Dealer i 

Branch — Springfield    2 

Class   of   machine — Implement i 

These  code  numbers  are  noted  on  the  invoice  (Form  A)  the 
punch  operator  using  these  notations  as  a  guide  in  the  punching 
of  the  machine  sales  card  (Form  D). 

The  machine  cards  are  sorted  by  salesmen  and  class  of  ma- 
chine sold  and  are  then  tabulated  as  illustrated  to  give  the  fol- 
lowing information  relative  to  the  sales  of  the  individual 
salesman: 

1  The  number  of  each  kind  of  machine  sold 

2  The  total  amount  billed  for  each  kind  of  machine 

3  The  freight  billed  for  each  kind  of  machine 


176 

This  Information  is  posted  to  the  analysis  of  machine  sales 
by  salesman  (Form  H)  and  by  reference  to  the  standard  cost 
cards  (not  illustrated  but  similar  in  form  to  Form  C,  Fig- 
ure 5,  see  Chapter  III)  the  standard  cost  of  machines  sold 
is  obtained,  and  totalled  by  classes,  in  the  case  illustrated,  it 
being  assumed  that  the  standard  cost  of  all  machines  of  the 
implement  class  sold  by  J.  G.  Jones  was  $2000.  In  order  to 
obtain  the  relation  between  the  standard  and  actual  cost  of  this 
class  of  machine  an  inventory  account  (Form  F)  is  carried, 
this  account  following  the  lines  previously  described  and  show- 
ing in  parallel  columns  the  standard  and  actual  cost  of  the 
machines  manufactured.  In  the  case  taken  as  an  example  it 
appears  that  the  actual  cost  of  the  machines  of  the  implement 
class  carried  in  the  Springfield  Branch  represented  140  per  cent 
of  standard,  so  that  the  gross  profit  realized  from  J.  G.  Jones' 
sales  of  implements  for  the  month  works  out  as  follows: 

Standard  cost  of  implements  sold $2000 

Ratio  of  actual  cost  to  standard  per  cent 140 

Actual  cost  of  implements  sold $2800 

Amount  of  implement  billings $3010 

Gross  profit  on  J.  G.  Jones'  implement  sales.  .  .  $210 

The  method  shown  of  figuring  machine  sales  individually  is 
feasible  in  this  case  as  these  sales  are  comparatively  small  in 
number  as  compared  with  repair  part  sales,  which  in  a  large 
concern  may  total  to  several  hundred  thousand  items  in  a  year, 
and  accordingly  some  other  method  recjuires  to  be  adopted  in 
order  to  be  able  to  figure  profits  realized  on  sales  of  repair 
parts.    The  method  adopted  is  illustrated  in  the  following  forms : 

Repair  parts  sales  invoice Form  B 

Repair  parts  sales  card Form  E 

Implement  repair  part  inventory  account Form  G 

A  consideration  of  these  forms  will  show  that  these  repair 
parts  are  billed  to  customers  on  a  list  "less  discount  basis  and 
accordingly  to  eliminate  the  refiguring  of  invoices  the  implement 
repair  part  inventory  account  is  carried  on  both  list  and  actual 
cost  bases,  the  ratio  of  actual  cost  to  list  being  shown. 

The  repair  parts  sales  card  provides  for  the  punching  of  the 
repair  parts  class  number,  the  list  price  of  the  repairs  sold  and 
the  amount  billed,  and  as  illustrated  these  cards  are  sorted  by 
class  numbers  and  salesmen  and  tabulated  to  show  as  regards 
the  sales  for  each  class  of  repair  part  by  each  salesman: 


The  total  list  price  of  all  sales  for  the  class. 
The  total  amount  billed  for  all  such  sales. 

According  to  the  implement  repair  parts  inventory  account 
for  the  Springfield  branch  (Form  G)  the  actual  cost  of  these 
parts  represented  30  per  cent  of  list  and  accordingly  J.  G.  Jones' 
showing  on  sales  of  repair  parts  of  the  implement  class  is  made 
up  as  follows: 

Total  list  value  of  implement  repair  parts  sold 

by  J.  G.  Jones  in  month $89.00 

Ratio  actual  cost  to  list  per  cent 30 

Actual  cost  of  implement  repair  parts  sold.  .  .  .  26.70 
Total  billed  sales  of  implement  repair  parts.  .  .  82.67 
Gross   profit    55-97 

Reference  was  previously  made  to  the  facility  with  which 
under  the  standard  or  specification  plan  of  cost  accounting,  a 
distinction  can  be  made  between  the  results  obtained  by  the 
sales  and  manufacturing  divisions  and  though  not  specifically 
shown  on  the  diagram  it  will  be  easily  understood  that  by  using 
fixed  ratios  for  the  year  in  figuring  salesmen's  profits  the 
element  of  fluctuating  manufacturing  costs  could  be  eliminated 
from  the  salesmen's  profit  and  loss  statements.  The  difi'erence 
between  the  costs  charged  against  the  salesmen  and  the  actual 
costs  would  then  appear  as  a  separate  item  on  the  branch  profit 
and  loss  statement.  For  instance,  assuming  that  the  ratio  of 
actual  cost  to  list  for  implement  repair  parts  was  fixed  as  regards 
salesmen  at  26  per  cent  while,  as  noted  above,  the  actual  cost 
was  increased  to  30  per  cent,  the  profit  on  the  implement  repair 
parts  sold  by  J.  G.  Jones  would  be  shown  as  follows: 

List  price  of  implement  repair  parts  sold  by  J. 

G.   Jones    $89.00 

Ratio  of  actual  cost  to  list  adopted  for  year  per 

cent 26 

Charge  to  J.  G.  Jones  for  cost  of  sales $23.14 

Total  billed $82.67 

J.  G.  Jones'  gross  profit $59-53 

Excess  manufacturing  cost  4  per  cent  of  list 

value  of  sales  of  $89.00 $3-56 

Actual  gross  profit  on  J.  G.  Jones'  sales  of  im- 
plement repair  parts $55-97 


Chapter  IX 
COST  ACCOUNTING  AND  SCIENTIFIC  METHOD 

THE  practical  value  of  any  science  lies  in  the  power  it  gives 
of  foretelling  the  results  which  will  follow  from  a  given 
combination  of  conditions,  or,  as  Herbert  Spencer  stated,  "the 
business  of  science  is  to  predict."  This  power  of  science  to 
predict  lies  in  the  fact  that  the  universe  is  subject  to  the  opera- 
tion of  immutable  physical  laws  so  that  if  the  presence  of  a 
certain  combination  of  conditions  at  one  time  gives  a  certain 
result,  the  identical  combination  of  conditions  at  any  subsequent 
time  will  result  in  a  recurrence  of  the  result  previously  obtained. 
Science,  therefore,  involves  an  investigation  into  causes,  the 
scientific  conception  of  which  is  defined  by  J.  A.  Thomson  as 
being,  "the  totality  of  the  conditions  in  the  presence  of  which 
an  event  occurs,  and  in  the  absence  of  any  member  of  which 
it  does  not  occur." 

Engineering  science  is  founded  on  the  knowledge  of  the  results 
which  will  surely  follow  certain  combinations  of  conditions  so 
that  the  naval  engineer  from  his  tables  can  calculate  the  speed 
of  a  battleship  before  even  its  keel  is  laid,  and  the  electrical 
engineer  the  power  which  will  be  produced  from  a  generator, 
the  work  upon  which  has  not  proceeded  beyond  the  blue  print 
stage. 

The  practical  application  of  astronomical  science  in  the  art  of 
navigation  lies  in  the  ability  of  the  astronomer  to  predict  the 
exact  position  of  the  sun  or  some  other  heavenly  body  in  a 
given  latitude  and  longitude  at  a  given  moment.  The  practical 
value  of  meteorology  lies  in  the  ability  which  it  gives  to  predict 
weather  conditions  and  of  geology  to  predict  the  presence  of 
mineral  wealth  before  even  the  first  stroke  of  the  pick  is  made. 

The  Value  of  Prediction 

The  late  Mr.  H.  L.  Gantt  shortly  before  his  death  indicted 
the  science  of  economics  for  its  failure  to  predict  the  tremendous 
catastrophe  of  the  World  War,  and  the  resultant  lack  of  pre- 

178 


179 

paredness  of  the  world  outside  of  Germany  to  meet  this  cata- 
clysm. We  are  beginning  to  realize  that  it  is  by  this  standard 
of  being  able  to  predict  correctly,  to  foresee,  that  we  must  in 
the  future  appraise  our  sciences  and  our  professions.  The  value 
of  a  lawyer  lies  not  so  much  in  his  ability  to  get  us  out  of  trouble 
but  in  his  counsel  in  keeping  us  out  of  lawsuits,  in  his  advice 
before  the  event  rather  than  in  his  assistance  after  we  are  in 
deep  water.  The  old-fashioned  physician  still  regards  his  duty 
as  being  limited  to  curing  us  w'hen  w^e  have  become  sick,  often 
waiting  until  it  is  too  late  to  save  his  patient,  whereas  the  modern 
medico  makes  periodical  examinations  of  his  patient's  condition 
and  brings  to  light  unfavorable  tendencies  in  the  early  stages 
so  that  steps  can  be  taken  to  avert  disease  long  before  the  patient 
is  aware  of  any  unpleasant  symptoms.  More  American  lives 
\vere  sacrificed  in  the  winter  of  1918  through  the  influenza 
epidemic  than  were  lost  in  the  World  War,  yet  it  was  stated 
by  the  proprietor  of  a  gymnasium  in  New  York  City  that  of 
the  large  number  of  active  members  which  comprised  its  clientele 
not  a  single  one  caught  this  disease.  Probably  more  lives  are 
needlessly  lost  and  more  property  wasted  through  a  lack  of 
foresight  than  all  other  causes  combined.  The  old  proverb  to 
the  effect  that  prevention  is  better  than  cure  still  rings  true,  and 
whatever  interest  may  be  aroused  by  the  result  of  a  post-mortem 
is  certainly  not  shared  by  the  erstwhile  patient. 

Considered  from  the  standpoint  of  the  dictum  of  Herbert 
Spencer,  previously  quoted,  that  "the  business  of  science  is  to 
predict"  scientific  management  ranks  high,  for  as  the  author 
stated  in  a  previous  chapter : 

Scientific  management  is  more  than  a  system  of  shop  management — 
it  is  akin  to  a  state  of  mind — a  mental  attitude.  Considered  in  its  essential 
features  scientific  management  represents  the  use  of  the  trained  imagination 
in  industrial  life — a  looking  forward  rather  than  a  looking  backward — 
the  doing  of  things  mentally  before  the  attempt  is  made  to  perform  them 
on  the  physical  plane. 

Briefly  stated,  scientific  management  is  foresight,  the  pre- 
determination of  methods  and  results.  It  represents  the  applica- 
tion of  the  same  principle  in  the  operation  of  machines  as  is 
employed  in  their  design. 

Foresight  is  necessarily  a  habit  with  the  engineer.  Obviously, 
he  cannot  wait  until  a  bridge  is  constructed  in  order  to  ascertain 
wdiether  it  will  withstand  the  strain  to  w-hich  it  will  require  to 
be  subjected.     It  is,  therefore,  not  surprising  that  the  engineer 


I  So 

has  readily  embraced  the  Idea  of  scientific  management;  for 
has  not  his  whole  training  and  experience  been  along  the  lines 
of  "doing  things  mentally  before  the  attempt  is  made  to  perform 
them  on  the  physical  plane?" 

The  Difference  Between  Accountant  and  Engineer 

The  training  and  experience  of  the  professional  accountant, 
however,  is  along  totally  different  lines  to  that  of  the  engineer. 
By  far  the  greater  proportion  of  the  work  of  a  professional 
accountant's  office  is  auditing  and  investigation  and  after  many 
years  of  continuous  and  exacting  training  in  this  line  of  work, 
it  is  not  surprising  that  his  viewpoint  as  regards  business  transac- 
tions is  mainly  retrospective,  and  that  the  less  he  is  gifted  with 
the  faculty  of  imagination  the  better. 

The  professional  accountant's  viewpoint  is,  of  course,  ab- 
solutely proper  as  regards  his  work  of  certifying  as  to  the 
accuracy  of  the  accounts  and  statements  recording  past  trans- 
actions, but  unfortunately  in  his  incursions  into  the  field 
of  cost  accounting  he  has  not  realized  that  the  problems  here 
are  of  an  entirely  different  order  to  those  which  are  involved  in 
the  certification  of  the  records  of  past  transactions  and  has 
drawn  up  his  accounting  systems  with  the  main  purpose  of  meet- 
ing the  requirements  of  the  treasurer's  department,  totally  neg- 
lecting to  provide  for  the  needs  of  the  producing  end  of  the 
business. 

Post-mortem    Cost  Accounting 

It  is  now  many  years  since  Mr.  Harrington  Emerson  drew 
the  attention  of  the  industrial  world  to  the  unsuitability  of  post- 
mortem systems  of  cost  accounting  to  meet  the  requirements 
of  an  industrial  world  which  was  gradually  embracing  the  idea 
of  scientific  management.  Since  that  time  though  he  and  other 
prominent  engineers  have  repeated  and  emphasized  this  conten- 
tion, the  professional  accountant  with  few  exceptions  is  still 
providing  his  clients  with  these  post-mortem  methods  of  account- 
ing, which  though  probably  suitable  to  meet  the  requirements 
of  the  financial  interests  are  hopelessly  and  absolutely  out  of 
harmony  with  the  needs  and  viewpoint  of  the  producing  end 
of  the  business.  Mr.  H.  L.  Gantt  even  went  so  far  as  to  state 
that  the  failure  of  manufacturers  to  repair  the  leak  of  non- 
production  is  primarily  due  to  the   fallacious  methods  of  cost 


accounting  approved  by  professional  accountants,  and  engineers 
generally  seem  pretty  well  in  accord  that  one  of  the  most  serious 
drags  on  the  industrial  wheel  of  progress  is  the  failure  of 
accountants  generally  to  appreciate  the  urgent  need  of  an  ab- 
solute revision  of  their  ideas  on  cost  accounting. 

The  practical  value  of  history  is  the  ability  which  it  gives  from 
a  study  of  past  events  to  determine  what  to  expect  in  the  future 
and  the  value  of  past  records  of  accounting  should  be  regarded 
from  the  standpoint  of  the  extent  to  which  they  also  enable 
us  to  exercise  foresight  in  the  conduct  of  our  business  affairs. 
Unfortunately,  this  function  of  cost  accounting  is  rarely  exer- 
cised, such  use  of  cost  records  for  this  purpose  as  is  made  being 
more  or  less  incidental. 

As  soon,  however,  as  we  reverse  the  usual  order  of  things, 
and  instead  of  confining  our  accounting  work  to  compilations 
of  past  happenings  determine  our  costs  in  advance,  we  find  that 
our  viewpoint  on  the  purpose  of  accounts  is  immediately  and 
vitally  changed,  for  we  are  not  only  interested  in  what  things 
actually  cost  but  even  more  in  the  differences  between  what  we 
figured  the  goods  should  and  did  cost,  and  forthwith  we  call 
for  an  analysis  of  these  variations  into  causes. 

Mr.  Harrington  Emerson  in  discussing  the  defects  of  post- 
mortem systems  of  cost  accounting  stated  that  such  systems  are 
"wholly  and  absolutely  incorrect,  mixing  up  with  costs  incidents 
that  do  not  have  the  remotest  direct  connection  with  them,  so 
that  analysis  of  cost  statements  .  .  .  does  not  lead  to  elimina- 
tion of  wastes."  When,  however,  costs  require  to  be  pre- 
determined and  to  be  analyzed  into  causes  of  increases  and 
decreases  as  compared  with  the  estimates,  it  is  obvious  that  if 
the  cost  accountant  charges  any  cost  account  with  an  item 
of  expense  not  properly  belonging  there,  he  will  quickly  be  called 
upon  to  justify  his  action.  Furthermore,  cost  predetermination 
does  lead  to  the  elimination  of  wastes. 

The  average  post-mortem  cost  system  is  more  remarkable  for 
its  power  of  concealing  essential  facts  than  for  disclosing  them, 
and  it  seems  to  the  author  that  manufacturers  in  these  days 
must  be  asking  themselves  searching  questions  relative  to  the 
adequacy  of  their  cost  records. 

The  IMaxufacturer's  Need  of  Knowledge 

The  hectic  davs  of  the  war  period  are  over.  As  business 
settles  down  the  manufacturer  is  beginning  to  take  stock.     As 


l82 

a  part  of  this  process  he  is  naturally  desirous  of  ascertaining 
how  he  stands  in  comparison  with  the  pre-war  period.  He  is 
paying  a  great  deal  more  for  his  labor,  and  this  being  a  condition 
over  which  he  has  little  if  any  control  he  accepts  philosophically 
and  charges  to  his  customers  but  he  does  want  to  know  whether 
he  is  getting  as  much  work  done  per  man  hour  as  he  was  before. 
His  repair  bill  is  way  up,  which  is  inevitable  owing  to  increases 
in  the  price  of  both  material  and  labor,  but  is  all  of  the  increase 
in  this  cost  of  repairs  due  to  this  cause — may  not  some  of  it  be 
due  to  more  labor  and  more  material  being  used  than  formerly? 
Conversely,  is  it  not  possible  that  the  efficiency  of  his  repair  men 
may  have  increased,  or  that  his  machines  are  being  handled  more 
carefully  and  do  not  require  so  much  repairing  so  that  although 
his  repair  cost  in  total  is  increased,  as  a  matter  of  fact,  figured 
on  the  pre-war  price  scale  his  repair  costs  to-day  are  less  than 
formerly? 

There  is  probably  not  one  manufacturing  institution  in  a 
hundred  where  statements  of  operating  costs  before  the  war  can 
be  intelligently  compared  with  statements  of  current  operating 
costs  and  this  remark  applies  also  to  comparisons  of  statements 
from  month  to  month  and  year  to  year.  The  reason  for  this  con- 
dition is  clear.  The  average  cost  system  having  been  designed 
solely  for  the  purpose  of  obtaining  the  cost  of  product  in  terms 
of  dollars  and  cents,  does  not  provide  for  a  complete  separation 
of  cost  data  into  elements  and,  therefore,  in  making  comparisons 
of  costs  in  different  periods  it  is  not  possible,  without  an  immense 
amount  of  detailed  investigation,  to  determine  to  what  extent 
increases  and  decreases  in  cost  are  due  to  general  economic 
causes  over  which  the  manufacturer  has  no  control,  and  to  varia- 
tions in  actual  operating  efficiency. 


The  Difficulty  of  Comparison 

In  the  author's  experience  it  is  the  exception  rather  than  the 
rule  to  find  any  mention  in  a  cost  statement  of  hours  of  labor 
as  distinguished  from  the  amount  paid  for  labor,  so  that  in 
comparing  a  cost  statement  of  to-day  with  one  prepared  before 
the  war,  we  are  not  able  to  determine  to  wdiat  extent  an  increase 
has  resulted  from  a  raise  in  the  scale  of  wages  nor  to  ascertain 
whether  the  present  cost  in  terms  of  labor  and  machine  hours 
is  greater  or  less  than  before.  As  an  example,  we  may  take 
a  comparison  of  the  cost  of  machine  repairs  to-day  with  the 


i83 

costs  of  several  years  ago.  To  compare  such  costs  intelligently 
we  must  be  able  to  separate  these  into  their  basic  elements  and 
to  segregate  those  elements  of  cost  over  which  we  have  ccmtrol 
from  those  which  are  the  result  of  general  business  conditions. 
If  we  wish  to  interpret  clearly  the  repair  figures  shown  on 
two  cost  statements  we  must  be  able  to  determine  to  what  extent 
increases  or  decreases  are  due  to  variations  in: 

1  The  number  of  hours  of  work  of  different  classes  of 

workmen  employed 

2  The  average  rates  of  pay  of  such  workmen 

3  The  quantities  of  repair  material  used 

4  The  prices  paid  for  such  material 

The  above  information  would  require  to  be  shown  not  only  in 
total  but  also  in  relation  to  the  number  of  hours  the  machines 
were  operating  and  to  the  work  produced  therefrom. 

In  many  cost  statements,  however,  and  in  fact  in  the  great 
majority,  repair  costs  are  simply  stated  in  terms  of  dollars  and 
cents,  and  though  such  information  may  meet  the  requirements 
of  the  accountant  in  the  preparation  of  his  balance  sheet  and 
profit  and  loss  account,  it  is  entirely  inadequate  to  meet  the 
needs  of  the  plant  superintendent  in  his  efforts  toward  decreasing 
costs  of  manufacture. 

It  is  the  usual  complaint  of  the  cost  accountant  that  the 
operating  men  do  not  analyze  the  elaborate  and  detailed  state- 
ments which  he  prepares  for  their  guidance.  In  making  this 
criticism  he  overlooks,  first,  that  the  data  he  presents  are  not 
sufficient  to  enable  the  right  kind  of  analysis  to  be  made  and, 
second,  that  such  analysis  is  the  proper  function  of  the  cost 
accountant  and  not  of  the  operating  man. 

The  Cost  of  Idleness  vs.  the  Cost  of  Production 

The  most  serious  defect,  however,  in  the  accepted  systems  of 
cost  accounting  is  the  failure  to  distinguish  between  the  cost 
of  production  and  the  cost  of  idleness.  The  phenomenal  growth 
of  German  industry  before  the  war  was  largely  due  to  her 
appreciation  of  the  importance  of  keeping  her  factories  operating 
at  full  capacity;  as  Henri  Hauser  in  his  illuminating  book,  "Ger- 
many's Commercial  Grip  on  the  World,"  states,  Germany  fully 
understood  that: 

It  is  no  longer  the  demand  that  regulates  the  stream  of  production, 
it  is  the  plant;   it  is  the   furnace  which  must  not  be  permitted  to  go  out, 


i84 

it  is  the  machine  which  must  continue  to  revolve,  it  is  the  dynamo  which 
does  not  cease  from  transferring  into  electric  power  the  energy  created 
b}-  coal  or  by  water  power. 

As  a  general  rule,  however,  cost  systems  do  not  show  the 
cost  of  non-production  but  ingeniously  saddle  the  machine  which 
works  with  the  cost  of  the  machine  which  is  idle.  As  soon, 
however,  as  our  cost  statements  show  each  month  the  big  red 
figure  which  represents  the  cost  of  non-production  our  manufac- 
turers will  realize  that  idleness  is  the  one  thing  which  they 
cannot  afford.  There  is  all  the  difference  between  realizing  in 
a  general  way  that  reduced  production  means  increased  costs 
and  having  this  fact  brought  to  our  attention  each  month  by  a 
definite  statement  of  the  thousands  of  dollars  which  have  resulted 
from  the  idleness  of  men  and  equipment.  When  our  accounting 
systems  provide  this  information  there  will  result  a  tremendous 
impetus  to  American  export  business,  for  as  former  Secretary 
Lane  states : 

Our  industries  have  so  grown  that  their  output  when  run  continuously 
at  full  time  is  greater  than  our  home  market  will  take  at  its  best,  and 
when  times  are  dull  there  is  a  large  surplus  of  unsold  goods.  Out  of 
this  condition  has  grown  first  the  wish  and  then  the  need  to  obtain  foreign 
markets.  .  .  . 

Some  have  known  what  it  means  to  have  a  plant  made  for  production 
lie  idle,  eating  its  head  off.  Sometimes  it  happens  that  there  is  a  product 
one  could  cheaply  make  but  which  one's  particular  market  did  not  want. 
Perhaps  there  is  some  by-product  which  could  be  made  if  we  knew  where 
it  could  be  sold.  For  these  and  similar  ills  the  door  of  opportunity  lies 
open,  affords  a  remedy.  Out  there  beyond  the  wall  are  many  men  of 
many  minds,  some  of  whom  v/ill  like  what  we  make  if  we  could  sell  it, 
or  who  can  use  enough  of  our  present  product  to  add  to  the  output  of 
to-day  that  which  shall  make  the  whole   cost  less  per  unit. 

The  merging  of  the  cost  of  idleness  with  the  cost  of  produc- 
tion absolutely  kills  the  value  of  cost  statements  considered  as 
indices  of  operating  efficiency.  Every  open  hearth  superin- 
tendent knows  that  the  cost  standards  when  he  is  operating  half 
of  his  furnaces  are  absolutely  different  to  what  they  should  be 
w^hen  all  of  his  furnaces  are  in  operation.  It  is  no  fault  of  his 
that  there  are  only  sufficient  orders  to  take  half  his  capacity, 
but  the  result  of  this  factor  is  not  shown  separately  in  the 
cost  records,  so  that  comparisons  of  costs  from  month  to  month 
mean  little  or  nothing,  for  the  difference  in  legitimate  costs  when 
the  furnaces  are  running  full  capacity  and  when  only  half  of 
them  are  operating  is  probably  greater  than  could  ever  result 
from  fluctuations  in  operating  efficiency. 


i85 

Mr.  H.  L.  Gantt  presented  the  case  of  the  producing  end  of 
manufacturing  against  the  professional  accountant  very  suc- 
cinctly when  he  wrote: 

Most  of  the  cost  systems  in  use,  and  the  theories  on  which  they  are 
based,  have  been  devised  by  accountants  for  the  benefit  of  financiers,  whose 
aim  has  been  to  criticize  the  factory  and  to  make  it  responsible  for  all 
the  shortcomings  of  the  business.  In  this  they  have  succeeded  admirably, 
largely  because  the  methods  used  are  not  so  devised  as  to  enable  the 
superintendent  to  present  his  side  of  the  case. 

One  of  the  prime  functions  of  cost-keeping  is  to  enable  the  superintendent 
to  know  whether  or  not  he  is  doing  the  work  he  is  responsible  for  as 
economically  as  possible,  a  function  which  is  ignored  in  the  majority  of 
cost  systems  now  in  general  use. 

It  is  quite  obvious  that  for  a  cost  system  to  ''enable  the  super- 
intendent to  know  whether  or  not  he  is  doing  the  work  he  is 
responsible  for  as  economically  as  possible"  it  is  necessary  for 
us  to  distinguish  between  expenses  for  which  the  superintendent 
is  directly  responsible  and  those  over  which  he  has  no  control, 
and  further  in  order  to  be  in  a  position  to  state  whether  he  is 
producing  as  economically  as  possible  it  is  obvious  that  we 
require  standards  for  all  expenses  so  that  we  can  compare  our 
actual  expense  with  our  standard. 

Little  argument  is  necessary  to  establish  the  fact  that  the  usual 
post-mortem  system  of  cost  accounting  fails  totally  to  measure 
up  to  these  requirements.  The  author  does  not  deny  the  use- 
fulness of  the  records  of  past  experience  which  it  is  the  purpose 
of  these  post-mortem  cost  accounting  systems  to  furnish ;  he 
does,  however,  deplore  the  restriction  of  cost  methods  to  this 
single  end.  Ralph  Waldo  Emerson  was  alive  to  l)oth  the  value 
and  limitations  of  experience  when  he  wrote: 

Experience  is  hands  and  feet  to  every  enterprise — yet  he  who  should 
do  his  business  on  this  understanding  would  be  quickly  bankrupt. 


A  Humiliating  Situation 

Illustrating  the  truth  of  this  dictum  the  author  calls  to  mind 
the  case  of  a  certain  large  manufacturing  concern  which  for 
many  years  kept  records  showing  the  percentage  of  net  profits 
realized  on  its  sales  and,  as  year  after  year  this  percentage 
showed  no  material  variation,  in  the  course  of  time  it  became 
the  custom  to  use  this  percentage  as  the  basis  (^f  figuring  the 
profits  from  month  to  month.     This  procedure  was  adopted  in 


i86 

figuring  the  interim  profits  in  a  certain  year  and  out  of  these 
supposed  profits  a  substantial  dividend  was  declared  and  paid 
without  awaiting  the  final  accounting  based  on  the  physical  in- 
ventory at  the  close  of  the  fiscal  year.  Unfortunately  the 
directors  in  declaring  this  dividend  had  not  taken  into  account 
the  effect  of  important  changes  in  conditions,  with  the  result 
that  instead  of  having  realized  a  profit  it  transpired  that  a  net 
loss  had  resulted  from  the  year's  operations  and  the  dividend 
was  actually  paid  out  of  capital.  The  dismay  and  humiliation 
of  the  directors  of  that  company  may  better  be  imagined  than 
described. 


The  Larger  Significance  of  Double-entry  Bookkeeping 

All  business  transactions  are  dual  in  effect.  If  a  trader  pur- 
chases goods  for  cash  his  merchandise  is  increased  and  his  cash 
correspondingly  depleted ;  if  he  sells  these  goods  on  credit  his 
merchandise  is  decreased  and  his  accounts  receivable  correspond- 
ingly augmented  and  it  is  on  this  principle  that  is  founded  the 
double-entry  system  of  bookkeeping,  which  is  believed  to  have 
been  introduced  in  Venice  about  700  years  ago  and  which  is  now 
practically  universal.  It  is  held  by  accountants  that  no  cost 
system  can  be  considered  complete  unless  it  is  operated  on  the 
double-entry  plan,  so  that  the  mechanical  accuracy  of  the  figuring 
can  be  determined  by  means  of  a  trial  balance  which  is  a  list 
of  the  debit  and  credit  balances  at  a  given  time,  the  totals  of 
which  if  the  figuring  has  been  correct  must  balance  in  view  of 
the  fact  that  every  debit  entry  on  the  books  should  be  oft'set 
by  a  corresponding  credit  and  z'icc  versa. 

It  is  a  somewhat  extraordinary  fact,  however,  that  the  larger 
significance  of  the  double-entry  principle  has  not  been  realized 
by  accountants  generally  and  that  such  application  of  this  prin- 
ciple as  has  been  made  has  been  restricted  in  the  main  to  the 
peculiarly  technical  feature  represented  by  the  trial  balance. 
Considered  in  a  broader  sense  the  usual  cost  accounting  methods 
are  confined  to  showing  one  side  of  the  account  only — to  record- 
ing how  much  was  spent  for  labor  and  what  it  was  spent  for, 
but  not  whether  a  proper  equivalent  was  received  for  the  money 
expended — to  advising  as  to  the  cost  of  material  used,  not 
whether  it  was  used  efficiently  or  the  contrary.  Such  use  as  is 
made  generally  of  cost  data  for  the  purpose  of  determining 
whether  a  proper  return  has  been  made  for  money  expended  is 


i87 

merely  incidental,  haphazard,  and  incomplete.  Tliat  this  is  so 
is  just  what  might  be  expected  in  view  of  the  fact  that  the 
accounting  machinery  is  designed  to  meet  the  recjuirements  of  a 
restricted  ideal  and  when  an  attempt  is  made  to  use  it  for  a 
purpose  for  which  it  was  never  intended  it  is  about  as  clumsy 
and  inefficient  as  makeshift  appliances  generally  are. 


The  Figuring  of  Standardized  Operations 

An  immense  amount  of  energy  and  tremendous  investment  in 
expensive  time  keeping  equipment  is  more  or  less  uselessly  dis- 
sipated in  the  so-called  refinements  of  cost  distribution  which 
are  the  result  of  a  lack  of  appreciation  of  the  fundamental  im- 
portance of  bringing  the  factor  of  equivalency  into  cost  calcula- 
tions. There  seems  to  be  a  general  idea  that  if  we  obtain  a 
complete  distribution  of  the  time  consumed  by  every  workman 
our  cost  problems  will  be  solved,  whereas  in  many  cases  the  more 
complete  and  elaborate  such  distribution  is  the  farther  away 
we  get  from  the  results  desired  owing  to  the  impossibility  under 
the  methods  employed  of  digesting  the  tremendous  volume  of 
detailed  information  compiled.  The  author  has  been  in  factories 
where  an  operator  would  work  on  as  many  as  30  short-time 
operations  in  one  day,  each  change  of  work  necessitating  the 
stamping  of  the  time  on  the  card  for  the  jol)  just  completed 
and  the  issuing  and  stamping  of  another  card  for  the  succeeding 
job.  Under  such  conditions  it  may  easily  be  imagined  how 
little  actual  use  can  be  made  of  the  information  recorded  con- 
sidered from  the  standpoint  of  determining  whether  a  proper 
return  was  realized  from  the  money  expended. 

The  author  is  by  no  means  prejudiced  against  the  employment 
of  time  clocks  and  in  fact  would  be  loath  to  prescribe  methods 
for  a  concern  w-hich  was  opposed  to  their  use,  but  he  is  em- 
phatically out  of  sympathy  with  the  idea  of  figuring  the  cost 
of  every  performance  of  standardized  operations  on  stand- 
ardized products  when  the  same  operations  are  being  performed 
over  and  over  again,  generally  on  a  piece-work  basis.  And  yet 
there  are  innumerable  cost  systems  where  this  idiotic  procedure 
is  continuously  followed,  resulting  in  the  employment  of  an 
army  of  clerks  producing  information  of  practically  no  real 
value  and  to  this  end  adding  to  the  high  cost  of  living. 

It  is  not  only  the  expense  and  waste  of  time  involved  in  such 
methods  of  cost  accounting  which  are  to  be  deplored,  but  the 


more  serious  thing  is  that  such  methods,  in  spite  of  their  expense, 
do  not  give  adequate  results.  The  simple,  sensible  way  to  keep 
track  of  labor  costs  is  to  set  time  standards  for  each  operation 
and  instead  of  recording  the  time  spent  by  an  operator  on  every 
job  he  performs  during  the  day  to  compare  his  total  time  for 
the  day  with  his  production  figured  in  terms  of  standard  time. 
Under  such  a  method  all  that  is  required  in  the  form  of  time 
clocks  is  a  regular  in-and-out  clock  recording  the  actual  time 
spent  on  the  premises,  and  a  record  of  the  work  which  the  man 
produces.  This  method  eliminates  the  temptation  to  the  work- 
man to  equalize  the  time  spent  on  jobs  by  undercharging  one 
at  the  expense  of  another  and  gives  the  real  informaticjn  re- 
c|uired,  namely,  his  relative  efficiency,  this  being  expressed  as 
follows : 

Actual  time  spent lo  hours 

Work  produced  in  terms  of  standard.  ...      7  hours 
Efficiency 70  per  cent 

It  may  be  asked  very  pertinently  how,  under  this  method,  labor 
costs  can  be  distributed  to  the  various  articles  manufactured. 
Before  this  is  explained  it  will  be  well  to  dispose  of  the  favorite 
fallacy  that  if  John  Jones,  who  is  working  on  day  work  and 
not  feeling  w^ell  this  morning,  spends  twice  as  long  on  a  job 
as  he  would  if  he  had  not  been  out  late  the  night  before  this 
extra  cost  is  a  legitimate  charge  to  the  particular  article  on 
which  he  is  working,  and  that  extra  pay  for  overtime  should 
be  charged  to  specific  articles,  even  if  the  need  for  working 
overtime  is  a  general  one  and  the  decision  as  to  which  work 
is  to  be  done  in  the  regular  time  and  which  in  the  overtime 
period  more  or  less  fortuitous.  The  author  claims,  and  believes 
that  in  this  he  will  be  supported  by  most  practical  men,  that 
such  increases  over  the  normal  cost  should  be  regarded  as 
charges  against  the  product  in  general  and  not  against  the  un- 
fortunate article  which  happens  to  come  along  at  the  time  when 
the  cost  increasing  event  occurs.  More  important  still,  even 
if  such  extra  expense  is  ultimately  merged  in  the  product,  w^iich 
generally  results  in  its  significance  being  entirely  lost  sight  of, 
it  should  first  show  clearly  on  the  records  and  cost  state- 
ments as  a  special  expense,  for  owing  to  the  inducement  of 
extra  pay  it  is  by  no  means  unusual  for  overtime  to  be  worked 
unnecessarilv. 


iJig 


The  Method  of  Distributixg  Labor  Costs 

The  air  having  hcen  cleared  as  to  the  basic  principles  of  labor 
distribution,  the  author  will  now  proceed  to  explain  the  methods 
followed  by  him  in  distributing  labor  costs  to  the  product  manu- 
factured without  adhering  to  the  customary  procedure  of  keep- 
ing careful  track  of  the  time  spent  by  an  operator  on  every 
job  he  performs  and  distributing  this  to  the  cost  of  the  different 
articles  manufactured.  As  to  whether  the  distribution  of  labor 
costs  to  the  product  should  be  made  by  specific  articles  or  classes 
of  product  depends  upon  the  individual  conditions,  but  the 
general  principles  will  be  made  clear  if  the  latter  case  is  taken 
as  an  illustration,  for  instance  that  of  a  manufacturer  of  agricul- 
tural implements  w^ho  desires  to  ascertain  the  profits  realized 
from  the  sales  of  the  different  classes  of  machines  manufac- 
tured by  him,  such  as  corn  planters,  grain  drills,  cultivators, 
harrows,  etc. 

For  the  purpose  of  obtaining  costs  of  sales  no  distinction 
need  be  made  on  the  cost  accounts  as  regards  how  much  labor 
was  expended  in  the  forge  shop  on  the  different  classes  of 
product,  all  forge  shop  productive  labor  being  in  total  carried 
on  a  forge  shop  labor  in  process  account  which  would  appear 
as  shown  in  Table  28. 

Table  28.     Forge  Shop  Labor-in-Process  Account 


Item 

Actual 

Standard 

Ratio 
Actual  to 
vStandard 
Per  Cent 

Si  820. 00 
931.00 

$1400.00 
700.00 

130 

Charge  for  month 

133 

Total                           

S2751.00 

$2100.00 

131 

To  obtain  the  cost  of  the  corn  planters  shipped  during  the 
month  (as  regards  the  element  of  forge  shop  labor)  necessitates 
determining  the  standard  forge  shop  labor  per  corn  planter,  this 
multiplied  by  the  number  c^f  machines  shipped  giving  the  total 


igo 

standard  forge  shop  labor  in  these  shipments.  This  standard 
labor  is  adjusted  to  an  actual  basis  by  the  use  of  the  ratio  of 
actual  to  standard  of  131  per  cent  as  shown  in  Table  28. 

Assume  for  instance  the  standard  forge  shop  labor  cost  per 
corn  planter  to  be  $1.00  and  the  number  of  corn  planters  shipped 
in  the  month  500,  the  calculations  would  be : 


Standard 

Ratio 

Actual  Labor 

Labor 

Actual  to  Standard 
per  cent 

in  Shipments 

$500.00 

131 

$655.00 

The  forge  shop  labor-in-process  account  w^ould  then  show  as 
in  Table  29,  the  balance  carried  forward  representing  the  forge 
shop  labor  cost  of  all  goods  remaining  unshipped: 


Table  29.     Forge  Shop  Labor-in-Process  Revised  Account 


Item 

Actual 

Standard 

Ratio 
Actual  to 
Standard 
Per  Cent 

Total  as  above  (Table  28.) 

$2751.00 
655.00 

$2100.00 
500 . 00 

131 
131 

Shipments 

Balance  carried  forward 

$2096 . 00 

$1600.00 

131 

Reverting  to  the  major  theme,  namely,  the  fundamental  im- 
portance of  the  factor  of  equivalency  in  cost  accounting — the 
opening  of  the  other  side  of  the  ledger  and  the  rendering  of 
cost  accounting  double-entry  in  the  fullest  and  most  vital  sense 
— it  may  be  stated,  that  it  is  only  along  these  lines  that  cost 
accounting  will  ever  fill  its  proper  place  in  the  economic  structure, 
for  records  of  actual  costs  without  parallel  statements  of  stand- 
ards are  as  Incomplete  as  a  trial  balance  which  shows  only  the 
debits  and  ignores  the  credits.  Parallel  statements  of  actual  and 
standard  costs  demand  an  analysis  of  increases  and  decreases 
and  when  this  is  furnished  the  problem  of  increasing  efficiency 
is  more  than  half  solved,  for  the  difficulty  in  the  average  manu- 
facturing plant  is  not  so  much  in  the  correcting  inefficiencies 


after  their  existence  has  been  disclosed  as  in  ascertaining  exactly 
where  to  start  on  the  work  of  cutting  costs. 

The  author  has  already  pointed  out  how  completely  the  under- 
lying idea  of  scientihc  management  conforms  to  Herbert 
Spencer's  dictum  that  "the  business  of  science  is  to  predict"  and 
how  far  the  usual  methods  of  cost  accounting  fall  short  of 
being  scientific  considered  from  this  standpoint.  But  the  power 
to  foresee  is  not  the  only  aim  of  science,  as  one  writer  states: 

The  ultimate  ideal  of  science  ...  is  simply  the  description  of  the  course 
of  events  by  the  aid  of  the  fewest  and  simplest  general  formulas. 

Cost  accounting  has  not  as  yet  realized  this  ideal.  There  are 
plenty  of  forms  but  few  formulas,  in  fact  the  only  cost  account- 
ing formulas  that  the  author  remembers  having  seen  in  print 
were  some  simple  formulas  devised  by  Mr.  Emerson  and  that 
given  by  the  late  Mr.  Gantt  in  his  book  entitled  "Organizing  for 
Work"  when  he  stated  that: 

The  indirect  expense  chargeable  to  the  output  of  a  factory  should  bear 
the  same  ratio  to  the  indirect  expense  necessary  to  run  the  factor}-  at 
normal  capacity,  as  the  output  in  question  bears  to  the  normal  output  of 
the  factory. 

Formulas  represent  the  boiled  down  experience  of  the  ages, 
as  Ralph  Waldo  Emerson  wrote : 

The  memory  disburdens  itself  of  its  cumbrous  catalogues  of  particulars, 
and  carries  centuries  of  observation  in  a  single  formula. 

Engineering  is  an  exact  science  and  the  work  of  that  profes- 
sion is  largely  founded  on  formulas  so  that  when  the  engineer 
finds  himself  in  the  domain  of  cost  accounting  he  is  naturally 
surprised  to  discover  so  much  opinion  and  so  little  in  the  nature 
of  facts  and  to  crave  definite  basic  formulas  like  that  given 
above.  Accountants  are  too  prone  to  quibble  over  non-essentials. 
The  author  remembers  a  discussion  some  years  ago  which  was 
waged  in  a  leading  accounting  journal,  and  which  covered  many 
pages  which  could  have  been  devoted  to  better  things,  on  the 
subject  of  whether  it  is  more  correct  to  head  a  profit  and  loss 
account  "for  the  period  ended  December  31,"  or  "for  the  period 
ending  December  31,"  and  he  has  never  seen  much  point 
to  the  everlasting  arguments  as  to  whether  interest  should  or 
should  not  be  included  in  costs,  probably  mainly  due  to  the  fact 
that  under  the  methods  he  employs  costs  can  be  easily  stated 
both  ways  and  those  with  pronounced  views  on  the  subject  can 
take  their  choice  and  be  happy. 


192 

Cost  accounting  at  present  has  reached  about  the  same  stage 
as  the  process  of  photographic  development  had  a  few  years 
ago  when  the  approved  practice  for  preforming  this  operation 
was  to  close  oneself  in  a  stuffy  darkroom  where  in  dim  red  light, 
the  photographic  enthusiast  would  mix  equal  parts  of  solutions 
one  and  two  and  wait  anxiously  for  the  appearance  of  the 
the  photographic  image.  If  this  did  not  appear  as  quickly  as 
he  thought  it  ought  to  he  would  add  an  extra  quantity  of  solution 
number  two  and  by  this  and  other  methods  endeavor  to  stimulate 
the  development  of  the  picture.  After  the  image  appeared  he 
had  to  use  his  judgment  when  to  stop  developing,  with  the  result 
that  generally  the  picture  was  either  over  or  underdeveloped,  to 
say  nothing  of  the  damage  to  the  film  resulting  from  the  various 
manipulations  performed.  The  whole  process  was  wasteful  of 
time,  temper,  and  chemicals,  the  results  were  generally  far  from 
satisfactory  and  the  amateur  had  to  be  very  enthusiastic  indeed 
to  wish  more  than  once  to  undertake  the  development  of  pictures. 
Nowadays,  by  means  of  a  tank,  a  thermometer  and  a  time  and 
temperature  table  a  dozen  exposures  can  be  developed  in  less 
than  15  minutes  without  ever  even  going  into  a  dark  room  and 
with  practically  perfect  results. 

The  author  has  previously  dealt  at  some  length  with  the  com- 
mon fallacy  "that  the  primary  purpose  to  be  aimed  at  in  any 
system  of  accounts  is  extreme  simplicity  of  design."  As  Mr. 
Benjamin  A.  Franklin  suggests,  however,  a  cost  system  should 
be  "a  panorama  of  the  movement  and  groupings  of  shop  events" 
and  a  cost  system  must  necessarily  be  complex  about  in  propor- 
tion to  the  complexity  of  the  events  which  it  attempts  to  portray. 
As  the  author  stated  in  an  earlier  chapter: 

There  is  no  way  of  avoiding  considerable  complexity  in  the  design  of 
systems  to  efficiently  handle  a  complex  business,  but  the  complexity  should 
stop  right  there,  for  a  sjstem  which  is  unduly  difficult  to  operate  is  to 
that  extent  defective  in  design. 

When  in  addition  to  providing  the  data  obtained  under  the 
usual  cost  methods,  namely,  costs  of  specific  articles  and  costs 
of  goods  sold,  a  comparison  of  all  expenditures  with  standard 
and  an  analysis  of  variations  according  to  "causes"  are  also 
furnished  by  the  methods  developed  by  the  author,  extreme  sim- 
plicity in  design  is  a  practical  impossibility.  If  simplicity  of 
design  were  the  only  ideal  in  locomotion,  however,  the  world 
would  still  be  using  wheelbarrows  in  place  of  automobiles. 


193 


Complexity  IN  Design:  Simplicity  in  Operation 

The  author  is  hoping  that  at  this  point  the  attentive  reader 
will  ask  the  question  that  the  above  remarks  have  been  leading 
up  to,  namely  "How  is  it  possible  to  combine  complexity  in  the 
design  of  a  system  with  extreme  simplicity  in  its  operation?" 
The  answer  has  already  been  suggested.  The  result  is  obtain- 
able by  the  use  of  formulas.  Under  the  methods  developed  by 
the  author  by  the  aid  of  formulas  the  most  complex  co3t  analyses 
can  be  accurately  and  speedily  made  by  any  clerk  who  can  read, 
write,  add,  and  subtract,  and  without  any  fuller  understanding 
of  the  principles  underlying  the  methods  followed  than  the 
average  girl  in  a  cost  department  who  uses  a  slide  rule  has  of 
logarithms. 

As  an  illustration  of  the  use  of  formulas  to  render  the  making 
of  complex  cost  analyses  an  exceedingly  simple  matter,  the  fol- 
lowing case  has  been  taken : 

It  is  assumed  that  it  is  desired  to  ascertain  the  variations 
between  actual  and  standard  cost  and  to  obtain  a  complete 
analysis  of  these  variations  in  the  pickling  department  of  a  steel 
mill.  It  is  also  assumed  that  the  production  of  this  department 
at  full  capacity  is  10,000,000  pounds  a  month  and  that  the 
standard  cost  of  production  on  this  basis  is  figured  as  follows: 

Producing  labor,  8,000  hours  at  average  rate 

of  0.60 $4,800 

Steam,  100,000  b.hp.  at  0.015 1,500 

Electricity  for  Exhaust  Fan,   10,000  kilowatt 

hours  at  0.02    200 

Acid,  1,000,000  pounds  at  0.0 1 10,000 

Labor  in  Repairs,  400  hours  at  average  rate 

of  0.50  per  hour 200 

jMaterial  in  Repairs 100 

Taxes,   Insurance,   etc 300 

Total $17,100 

The  electricity  for  the  exhaust  fan,  the  cost  of  repairs,  taxes, 
insurance,  etc.,  not  varying  directly  with  the  production  are 
regarded  as  being  in  the  nature  of  fixed  charges,  the  otlier  items 
of  expense  being  assumed  to  vary  directly  with  the  production. 
By  the  term  "fixed  charges"  as  used  here  it  is  not  to  be  under- 


194 

stood  that  the  amount  of  the  expense  will  not  fluctuate,  for 
obviously  in  the  case  of  the  electricity  used  for  the  exhaust 
fan  both  the  quantity  of  electricity  used  and  the  cost  of  produc- 
ing electricity  may  fluctuate.  For  such  an  item  of  expense  as 
this,  however,  if  the  production  of  the  department  is  less  than 
standard,  even  if  the  expense  itself  remains  constant,  there 
will  be  an  increase  in  cost  per  unit  of  production  as  compared 
with  standard,  owing  to  the  actual  expense  requiring  to  be 
spread  over  a  smaller  production.  It  is  in  this  sense  that  the 
term  "fixed  charges"  is  used  in  the  case  of  expense  items  coming 
under  this  head,  it  being  necessary  to  show  to  what  extent  an 
increase  in  cost  is  due  to  idle  time. 

The  problem  to  be  solved  by  the  use  of  formulas  is  as  follows: 
Given  the  actual  production  in  the  month  and  the  actual  ex- 
penditures, to  provide  comparisons  of  actual  and  standard  ex- 
pense analyzing  the  variations  between  actual  and  standard  as 
follows : 


Producing  Labor 


fDue  to  variations  between  ac- 
J       tual  and  standard  time. 
Due  to  variations  between  ac- 
tual and  standard  rates. 


Steam 


'Due  to  variations  in  the  quan- 
tity of  steam  used  as  com- 
pared with  standard. 
Due  to  variations  in  the  cost 
of  producing  steam  as  com- 
pared with  standard. 


Electricity     for    Exhaust 
Fan 


'Due  to  reduced  production  as 
the  fan  is  running  continu- 
ously. 
.=  Due  to  the  quantity  of  elec- 
tricity used. 
Due  to  the  cost  of  producing 
electricity. 


Acid 


'Due  to  variations  in  the  quan- 
tities of  acid  used  as  com- 
-{      pared  with  standard. 
Due  to  variations  in  the  price 
paid  for  acid. 


195 


Labor  in  Repairs 


Material  in  Rcoairs 


Taxes,  Insurance,  etc.        < 


'Due  to  reduced   production — • 

otherwise      the     idle      time 

factor. 
Due  to  variations  in  the  time 

spent  in  repair  work. 
Due  to  variations  in  the  rate 

paid  repair  men. 

'Due  to  reduced  production. 

Due  to  variations  in  the  quan- 
tity of  repair  material  used. 

Due  to  variations  in  the  price 
paid  for  repair  material. 

'  Due  to  decreased  production  as 

compared  with  standard. 
Due  to  variations  in  the  actual 
expense  for  taxes,  insurance, 
etc. 


All  of  the  above  items  of  information  can  be  obtained  by  a 
proper  combination  of  four  factors: 

A — The  actual  expense  for  the  month 
B — The  actual  expense  figured  at  standard  rates  or  prices. 
For  instance,  it  will  be  seen  by  reference  to  Table  30 
that  the  actual  producing  labor  was  assumed  to  be :  5800 
hours  at  0.65,  making  $3770,  this  being  entered  in  col- 
umn A.     But  the  standard  rate  per  hour  as  previously 
shown  was  0.60,  so  that  the  actual  expense  figured  at 
standard  rate  would  be:   5800  hours  at  $.60,  making 
$3480 
C — The  standard  cost  for  standard  production,  this  being 
the  standard  cost  on  a  10,000,000  pounds  a  month 
basis  as  previously  shown  and  totalling  to  $17,100 
D — The  standard  cost  for  actual  production,  this  being  the 
standard  cost  for  standard  production  (C)   divided 
by  the  standard  production  and  multiplied  by  the 
actual   production.      The   actual   production   in   the 
case  taken  as  an  illustration  being  7,500,000  pounds, 
the  standard  cost  for  this  production  is  figured  as 
follows : 
17,100.00 


10,000,000 


times  7,500,000,  making  $12,825.00 


ig6 

The  formulas  for  obtaining  the  different  items  of  information 
required  are  as  follows: 

1  Comparisons  of  actual  and  standard  in  total ;  D-A 

2  Variations  in  production:  D-C 

3  Time  efficiency,  expense  varying  directly  with  the  pro- 

duction, D-B 
3a  Time    efficiency    when    expense    in    nature    of    a    fixed 
charge:  C-B 

4  Variations  in  labor  rates:  B-A 

5  Variations    in    the    quantities    of    material    used    when 

expense  varies  directly  with  production :  D-B 
5a  Variations    in    the    quantities    of    material    used    when 
expense  is  in  nature  of  a  fixed  charge:  C-B 

6  Variations  in  the  price  of  material:  B-A 

7  Variation  in  expense  when  expense  varies  directly  with 

production:  D-B 
'ja  Variation  in  expense  when  expense  is  in  nature  of  a 
fixed  charge :  C-B 

8  Variation    in    the    consumption    of    service    production 

(steam,  electricity,  etc.)  when  expense  varies  directly 
with  production:  D-B 
8a  Variation  in  consumption  of  service  production  when 
expense  is  in  nature  of  a  fixed  charge:  C-B 

9  Variations  in  the  price  of  service  production:  B-A 

The  above  may  be  boiled  down  as  follows : 

D-A  Comparisons  in  total 
D-C  Variations  in  production 

D-B  Variations  in  expenses  not  of  a  fixed  charge  character: 
Variations  between  actual  and  standard  time. 
Variation  between  actual  and  standard  quantities  of 

material. 
Variations  between  actual  and  standard  expense. 
Variations  in  the  consumption  of  such  service  items 
as  power,  steam,  electricity,  etc. 
C-B  Variations  in  expense  in  the  nature  of  a  fixed  character: 
Variations  between  actual  and  standard  time. 
Variations  between  actual  and  standard  quantities 

of  material. 
Variations  between  actual  and  standard  expense. 


197 

Variations  in  the  consumption  of  such  service  items 
as  power,  steam,  electricity,  etc. 
B-A  Variations  in  rates  of  pay,  price  of  material  or  of 
service 

So,  all  information  required  in  the  case  chosen  as  an  illustra- 
tion can  be  obtained  by  the  use  of  five  simple  formulas. 

These  items  of  information  and  formulas  applying  thereto 
can  now  be  stated: 


Producing:  Labor 


Steam 


Electricity     for     Exhaust 
Fan   (fixed  charge) 


Labor    in    Repairs    (fixed 
charge) 


Materials      in      Repairs 
(fixed  charge) 


Taxes,      Insurance, 
(fixed  charges) 


r  Comparison  in  total .  D-A 
I  Time  Efficiency  ....  D-B 
i  Rate  variations B-A 

f  Comparison  in  total .  D-A 

<  Consumption D-B 

I  Price B-A 


etc. 


Comparison  in  total. D-A 

Variations   in  production, 

D-C 

Consumption C-B 

Price B-A 

'  Comparison  in  total .  D-A 
Variations   in   production, 
D-C 

Time  efficiency C-B 

Rate  variations B-A 

'Comparison  in  total. D-A 

Variations   in  production, 

D-C 

Material  consumption.  C-B 

Price  variations    ....  B-A 

'  Comparison  in  total .  D-A 
Variations   in  production, 
D-C 
Expense C-B 


In  actual  practice  as  is  shown  in  Table  30  the  work  of  figuring 
cost  variations  and  making  an  analysis  thereof  is  therefore 
rendered  an  absolutely  mechanical  process  as  follows: 


198 

First.  The  list  of  the  expense  accounts  and  the  figures  of 
standard  cost  for  standard  production  for  each  expense  account 
are  either  printed  or  otherwise  dupHcated  to  avoid  rewriting 
each  month  (see  column  C). 

Second.  The  formulas  for  ascertaining  each  class  of  variation 
are  shown  at  the  head  of  the  columns  provided  for  figuring  such 
variations — for  instance,  in  the  illustration  it  will  be  seen  that 
the  column  headed  ''Variations  in  Production"  has  the  formula 
D-C  printed  at  the  head  of  it. 

Third.  Each  of  these  variation  columns  is  given  a  number 
(corresponding  to  the  numbers  already  given)  as  follows: 

1  Comparison  in  total. 

2  Variations  in  production. 

3  Time  efiiciency. 

3a  Time  efiiciency  for  expense  in  the  nature  of  fixed  charge, 
etc. 

Fourth.  For  each  account  there  is  printed  the  numbers  of 
the  columns  for  the  variations  requiring  to  be  figured — for  in- 
stance, the  item  "Electricity  for  Exhaust  Fan"  has  the  following 
combination:  i,  2,  8a,  9,  meaning  that  for  this  item  of  expense 
variations  have  to  be  figured  as  follows: 

1  Comparison  in  total. 

2  Variations  in  production. 

8a  Service  consumption — fixed  charge  item. 
9     Price  of  service. 

The  formulas  being  printed  at  the  head  of  each  column,  the 
work  of  figuring  variations  is  purely  mechanical. 

To  make  it  all  entirely  clear,  the  proceeding  involved  in  figur- 
ing the  variations  in  this  one  item  of  expense,  "Electricity  for 
Exhaust  Fan,"  may  be  listed  as  follow^s: 

Standard  cost  of   standard  production  of    10,000,000 

pounds  is  $200.00 

Standard  cost  of  production   of   7,500,000  pounds   is 

1        r  200 

therefore times  7,i;oo,ooo=  $1^0.00 

10,000,000 

This  is  entered  in  column  D. 


199 

Actual  consumption  of  electricity  is  assumed  to  be  9000 
k.w.  hours  which  figured  at  the  actual  rate  of  .ooiS* 
per  k.w.  hour  is $162.00 

This  is  entered  in  column  A. 

Actual  consumption  of  9000  k.w.  hours  figured  at  stand- 
ard rate  of  .2  per  k.w.  hour  is $180.00 

This  is  entered  in  column  B. 

Comparison  of  the  actual  and  standard  expense  and  the 
analysis  of  the  variation  by  causes  in  accordance  with  the  formula 
given  above  are  then  made  as  follows: 

Increase  Dectease 
I     Variation  in  Total:       D-A     $150.00 

162.00       $12.00 


analyzed  as  follows: 

2.     Variations  in  production : 

D-C     $150.00 


200.00 

$50.00 

8a  Consumption:                  C-B 

$200.00 
180.00 

$20.00 

9     Price :                               B-A 

$180.00 
162.00 

18.00 

Net  increase  as  above 

12.00 

$50.00 

$50.00 

200 


Table  30.     Cost  Variation  Sheet — 


Formula 

Com- 
bination 

A 

B 

C 

Account 

Actual  Quantities  at 
Actual  Rates 

Actual 
Quanti- 
ties at 
Standard 
Rates 

Standard  Cost 
of  Standard 
Production 

Quantity 

Rate 

Amount 

Quantity 

Rate 

Amount 

Production 

10,0  0,000 

pou 

nds 

Producing  labor.  .  .  . 

1-3-4 

Hours 
5800 

0.6s 

3.770 

00 

3.480 

00 
00 

Hours 
8,000 

0.60 

4,800 

00 

1-8-9 

B.H.P. 
80,000 

0.016 

1,280 

00 

1,200 

B.H.P. 
100,000 

0.013 

1,500 

no 

Electricity     for     ex- 
haust fan 

i-2-8a-9 

K.W.  hrs. 
9,000 

0.018 

162 

00 

180 

00 

K.W.  hrs. 
10,000 

0.02 

200 

00 

Acid 

i-S-6 

Pounds 
730,000 

O.OII 

8,030 

00 

7.300 

00 

Pounds 
1,000,000 

O.OI 

10,000 

00 

Labor  in  repairs.  .  .  . 

l-2-3a-4 

Hours 
250 

0.60 

150 

00 

125 

00 

Hours 
400 

0.50 

200 

00 

Material  in  repairs. . 

1-2-50-6 

80 

00 

70 

00 

100 

00 

Taxes,  insurance,  etc. 

l-2-7a 

310 

00 

310 

00 

300 

00 

Totals 

13.782 

GO 

1 2,66s 

00 

17,100 

00 

Wherever  asterisk  appears  in  the  above 


Pickling  Department 


Month  ok  , 


D 

1        I 

2 

3&3a         4 

5&sa 

6 

7&70 

8  &80        9 

Com- 
parison 
in  Total 

Varia- 
tions in 
Pro- 
duc- 
tion 

D—C 

Labor 
Variations 

Material 
Variations 

Expense 
7  = 
D-B 

Service 

Standard  Cost 
of  Actual 
Production 

Time 

Rates 

Quant. 

Price 
B—A 

Quant. 

8  = 
D—B 

Price 

3  = 
D—B 

B—A 

5  = 
D—B 

B—A 

Quantity 

Amount 

D—A 

3a  = 
C—B 

C—B 

na  = 
C—B 

&a  = 
C-B 

7,500,000 

pounds 

00 
00 

00 

00 
00 

00 

00 
00 

00 

00 
00 

00 

00 
00 

00 
00 

00 

00 
00 

00 
00 

00 
00 

00 

00 
00 

00 

00 
00 

00 

00 
00 

00 
00 

00 
00 

00 

00 
00 

00 
00 

00 
00 

00 

00 
00 

00 

00 

1 

00 
00 

00 

00 
00 

00 
00 

00 
00 

00 

00 
00 

00 
00 

00 
00 

00 
00 

00 
00 

00 

00 

00 
00 

00 

Hours 
6,000 

3,6oo 

00 
00 
00 
00 
00 
00 
00 
00 

3600 
3770 

3600 
3480 

3480 
3770 

*I70 

120 

*290 

B.H.P. 

7S.OOO 

1,125 

II2S 

1280 

II2S 

1200 

1200 
1280 

*8o 

180 
162 

00 
00 

*ISS 

*7S 

00 

K.W.  hrs. 
7,500 

ISO 

ISO 
162 

ISO 
200 

200 
180 

00 
00 

*I2 

*So 

20 

18 

00 

Pounds 
750,000 

7.S00 

7SOO 
8030 

7SOO 
7300 

7300 
8030 

*S30 

200 

*73o 

Hours 
300 

150 

ISO 
ISO 

150 
200 

200 

I2S 

125 

ISO 

*So 

75 

*25 

7S 

75 
80 

7S 
100 

100 
70 

70 
80 

*S 

*2S 

30 

*IO 

22s 

225 
310 

225 
300 

195 

•740 

300 
310 

*85 

*75 

*IO 

12,825 

*957 

*200 

*3IS 

230 

*IO 

*SS 

*62 

00 

illustration,  red  figures  are  indicated. 


Chapter  X 

ESTABLISHING    A    SCIENTIFIC    BASIS    FOR    COST 

ACCOUNTING 

THE  oft-quoted  remark  that,  "a  man  should  know  something 
about  everything  and  everything  about  something"  ex- 
presses a  fundamental  truth.  Adherence  to  the  principle  there 
enunciated  will  render  it  possible  on  the  one  hand  to  avoid  the 
Scylla  of  dilettantism  and  on  the  other  to  steer  clear  of  the 
Charybdis  of  narrow  specialism  and  the  horrors  of  the  single- 
track  mind. 

This  is  the  age  of  the  specialist  and  even  with  minds  equipped 
with  many  tracks,  the  bulk  of  the  traffic  carried  must  be  restricted 
to  certain  limited  trains  of  thought  peculiar  to  the  line  of  work 
on  which  the  mind  is  mainly  occupied.  Herein  lurks  the  danger 
of  specialism,  for  unless  the  specialist  sees  his  calling  in  its 
proper  relationship  to  things  in  general  he  is  liable  to  develop 
the  single-track  mind — that  form  of  monomania  which  has 
resulted  in  there  being  some  dentists  who  attribute  all  human 
ills  to  diseased  dental  nerves,  some  physicians  to  germs,  some 
osteopaths  to  crooked  spines,  some  physical  culture  experts  to 
lack  of  exercise,  some  dietitians  to  improper  food  and  some 
enthusiasts  to  the  twin  demons  of  tobacco  and  rum. 

It  is  probable,  for  instance,  that  most  people  believe  that 
prohibition,  at  least  in  the  abstract,  presents  certain  desirable 
features,  but  when  the  average  sane  individual  reads  letters  in 
the  newspapers  urging  that  all  fiction  in  public  libraries  which 
refers  to  the  employment  of  alcoholic  stimulants  should  be 
destroyed,  and  that  all  paintings  in  public  galleries  depicting 
depraved  but  apparently  happy  persons  engaged  in  looking  on 
the  wine  when  it  is  red  should  be  incinerated,  the  question  which 
naturally  arises  in  his  mind  is  whether  there  must  not  be  more 
insane  persons  at  large  than  inside  the  asylums. 

It  might  be  well  to  mention  at  this  point,  as  explanatory  of 
the  motives  prompting  the  foregoing  remarks,  that  the  author 
believes  he  may  possibly  have  been  criticized  by  some  for  not 
hewing  sufficiently  to  the  mark  in  his  dissertations  on  cost  ac- 

202 


203 

counting,  for  using  valuable  space  in  gallivanting  around  the 
universe  when  the  space  might  better  have  been  devoted  to 
describing  such  purely  practical  details  appertaining  to  his  sub- 
ject as  the  form  which  stores  requisitions  should  take,  or  to 
discussing  the  merits  of  different  methods  of  handling  pay-rolls. 
Doubtless  to  some  there  is  considerable  charm  in  a  work  on 
cost  accounting  which  wastes  no  time  in  preliminary  frills,  but 
in  its  opening  paragraphs  strikes  at  the  roots  of  the  matter  by 
stating  that  "costs  are  divided  into  three  parts — material,  labor 
and  burden,"  but  the  author  ventures  to  question  the  advisability 
of  this  hurried  and  impetuous  diving  into  a  subject  and  to  sug- 
gest that  before  thus  launching  himself  so  enthusiastically  into 
the  deep  waters  thereof  the  wise  student  should  pause  to  get 
his  bearings  and  then  pause  again. 

One  of  the  prime  characteristics  of  the  scientific  mind — and 
though  the  accepted  methods  of  cost  accounting  are  far  from 
being  scientific,  cost  accounting  must  be  regarded  as  coming 
within  the  realm  of  science — is  a  sense  of  the  inter-relationship 
of  things.    As  Professor  J.  Arthur  Thomson  states: 

It  regards  Nature  as  a  vibrating  system  most  surely  and  subtly  inter- 
connected. It  discloses  a  world  of  interrelations,  a  long  procession  of 
causes,  a  web  of  life,  infinite  sequence  bound  by  the  iron  chain  of 
causality. 

Whatever  the  world  owes  to  Dr.  Frederick  Taylor — and  its 
obligation  is  great — it  is  to  Mr.  Harrington  Emerson  that  we 
are  indebted  for  our  conception  of  the  far-reaching  importance 
of  the  scientific  management  idea.  To  Taylor,  the  pioneer, 
scientific  management  was  essentially  a  system  of  shop  manage- 
ment; to  Emerson,  the  scientist,  scientific  management  is 
infinitely  more  than  this,  for  to  his  mind,  as  the  author  reads 
it  from  a  study  of  Mr.  Emerson's  published  works,  scientific 
management  represents  a  revolution  in  our  attitude  toward  life 
in  general  as  well  as  industrially,  and  a  light  on  the  path  which 
mankind  must  follow  if  it  is  to  realize  its  utmost  possibilities. 

That  great  master  of  inductive  science,  Francis  Bacon,  wrote: 

For  myself  I  found  that  I  was  fitted  for  nothing  so  well  as  for  the 
study  of  Truth;  as  having  a  mind  nimble  and  versatile  enough  to  catch 
the  resemblance  of  things  (which  is  the  chief  point)  and  at  the  same 
time  steady  enough  to  fix  and  distinguish  their  subtle  differences. 

And  though  there  were  some  who  failed  to  appreciate  and 
even   scoffed   at  the   wealth   of   illustration  in   Mr.   Emerson's 


204 

books,  the  tremendous  educational  value  of  these  writings  is 
largely  due  to  the  vivid  pictures  Mr.  Emerson  drew  and  his 
reputation  as  a  scientist — in  the  words  quoted  above,  to  his 
having  "a  mind  nimble  and  versatile  enough  to  catch  the  re- 
semblance of  things   (which  is  the  chief  point)." 


The  Narrow  Specialism  of  Scientific  Management 

It  is  largely  due  to  narrow  specialism  that  scientific  manage- 
ment is  still  regarded  by  many  of  its  exponents  as  being  merely 
a  system  of  shop  management  and  that  the  accounting  profes- 
sion as  a  whole  is  still  oblivious  of  the  importance  of  the  scien- 
tific management  idea  as  applied  to  cost  accounting  work.  It 
seems  in  fact  rather  remarkable  to  the  author  that  considering 
the  immense  amount  of  time  which  has  been  devoted  to  cost 
accounting  by  many  intelligent  men,  that  in  a  subject  so  obviously 
akin  to  mathematical  science  so  little  attempt  has  apparently 
been  made  to  determine  whether  the  accepted  methods  conform 
to  the  recognized  standards  of  scientific  work. 

In  the  previous  chapter  the  author  endeavored  to  show  how 
in  one  respect,  at  least,  cost  accounting  can  be  rendered  truly 
scientific  and  cjuoting  in  part  from  the  following  remarks  from 
the  pen  of  J.  Arthur  Thomson  demonstrated  how  the  operation 
of  the  laws  underlying  cost  phenomena  could  be  expressed  in 
simple  formulas,  and  also  showed  how  these  formulas  could  be 
applied  in  the  determination  of  cost  variations  and  in  the  analysis 
of  these  variations  according  to  certain  underlying  "causes": 

The  ultimate  ideal  of  science,  or  at  any  rate  of  physical  science,  is 
simply  the  description  of  the  course  of  events  by  the  aid  of  the  fewest 
and  simplest  general  formulae,  iriiy  things  happen  as  they  do,  it  is  now 
said  is  no  proper  question  for  science ;  its  sole  business  is  to  enable  us 
to  calculate  hozv  they  happen. 

Obviously,  as  Indicated  in  the  quotation  given  above,  the  func- 
tion of  cost  accounting  as  regards  the  determination  of  the 
"causes"  of  cost  variations  must  be  confined  to  showing  the 
effect  of  "efficient  causes,"  or  "caused  causes,"  not  "ultimate 
causes" ;  to  showing  hour  a  thing  happened,  not  why  it  happened. 
It  is  the  function  of  cost  accounting,  for  instance,  to  show  the 
extent  of  a  cost  increase  resulting  from  an  increase  in  rates 
of  pay,  but  it  is  obviously  not  within  the  province  of  the  cost 
records  per  se  to  show  why  there  was  an  increase  in  rates.   When 


205 


the  complexity  of  the  causes  underlying  the  present  high  cost 
of  living  (and  incidentally  the  "cost  of  high  living")  is  con- 
sidered it  would  seem  as  if  the  cost  accountant  were  to  be  con- 
gratulated on  the  fact  that  there  are  distinct  limitations  to  the 
scope  of  his  specialty. 


The  Value  of  Cost  Accouxtixg  Formulas 

In  the  previous  chapter,  the  illustration  of  the  use  of  formulas 
was  limited  to  showing  their  application  to  meet  a  simple 
example.  The  author,  however,  has  recently  compiled  tables  of 
formulas  covering  a  wide  range  of  conditions  and  as  he  finds 
these  tables  of  material  assistance  in  his  professional  practice 
he  believes  that  they  may  also  prove  helpful  to  others,  and  ac- 
cordingly with  this  end  in  view  these  tables  are  incorporated 
in  this  volume. 

Serious  students  of  cost  accounting,  it  is  believed,  will  be 
amply  repaid  for  time  spent  in  a  careful  study  of  these  tables. 
They  bring  to  a  focus  the  result  of  considerable  investigation 
into  the  fundamental  laws  underlying  cost  phenomena  and  provide 
the  means  of  solving  many  obscure  cost  problems.  Even  if  the 
cost  methods  of  a  business  are  not  drawn  up  along  the  lines 
recommended  by  the  writer  these  formulas  can  be  used  in  the 
solution  of  specific  cost  problems  as  shown  in  the  examples 
given. 

The  complete  formulas  are  embodied  in  two  tables — Tables 
31  and  32 — which  require  to  be  used  in  conjunction  with  each 
other.  The  use  of  these  tables  also  necessitates  an  understanding 
of  the  system  of  symbols  employed,  which  is  as  follows: 

The  capital  letters  A-H  are  used  to  indicate  the  different 
classes  of  accounting  data  which  enter  into  the  various  formulas, 
as  follows: 

A  indicates  the  actual  time  or  material  expended  figured 

at  the  actual  rates  of  pay  or  actual  price  of  the  material. 
B  indicates  the  actual  time  or  material  expended  figured  at 

the   standard  rates  of   pay  or   standard   price  of  the 

material. 
C  indicates  the  standard  cost  for  a  standard  working  month, 

say  of  25  working  days. 
D  indicates  the  standard  cost  for  the  number  of  working 

days   in   the   month — for   instance,    if   there    were   23 


2o6 

working  days  in  the  month  D  would  equal  23/2 5ths 
of  C. 
E  indicates  the  standard  cost  for  the  days  actually  worked 
in  the  month ;  for  instance,  if  a  plant  or  a  department 
were  closed  down  for  two  out  of  the  23  working  days 
in  the  month  assumed  above,  E  would  represent 
2i/25ths  of  C  or  2i/23rds  of  D. 

Note. — In  the  event  that  the  base  or  original  standard  is  being  used  for  all  com- 
parisons the  term  "standard  cost"  for  C,  D  and  E  above  refers  to  such  base  or  original 
standard.  In  the  event,  however,  that  a  revised  standard  is  being  used  for  the  purpose 
of  determining  operating  efficiencies,  or  an  alternate  standard  is  being  used,  or  a  revised 
alternate  standard,  then  the  term  "standard  cost"  as  used  above  in  the  explanation 
of  the  significance  of  C,  D  and  E  does  not  mean  the  basic  standard  but  the  revised, 
alternate   or   revised   alternate   standard,   as   the   case   may   be. 

F  indicates  the  alternate  standard  cost  of  the  actual  produc- 
tion in  the  month,  which  is  obtained  by  dividing  the 
alternate  standard  cost  for  a  standard  month  by  the 
standard  production  for  such  standard  month  and  mul- 
tiplying the  quotient  so  obtained  by  the  actual  produc- 
tion. By  the  term  "alternate  standard  cost"  is  meant 
a  standard  varying  from  the  base  or  original  standard 
and  set  up  as  a  gage  of  operating  efficiency  when  there 
is  some  variation  from  the  operating  methods  on  which 
the  base  standard  is  formulated.  For  instance,  the 
base  standard  may  be  founded  on  the  use  of  coal  in 
a  furnace,  the  alternate  standard  being  introduced  to 
bring  into  account  the  change  in  operating  standard 
when  fuel  oil  is  substituted  for  coal. 

G  indicates  the  revised  standard  cost  of  the  actual  produc- 
tion in  the  month  when  a  revised  standard  has  been 
introduced  for  the  purpose  of  bringing  comparisons 
for  the  determination  of  operating  efficiencies  into  line 
with  current  operating  standards.  This  is  figured  by 
dividing  C  by  the  standard  production  in  the  standard 
working  month  and  multiplying  the  quotient  by  the 
actual  production  for  the  month. 

H  indicates  the  basic  or  original  standard  cost  of  the  actual 
production  in  the  month. 

In  the  previous  chapter  in  order  to  simplify  the  presentation  of 
the  idea  of  using  formulas  in  determining  cost  variations  no  ref- 
erence was  made  to  the  effect  of  using  alternate  or  revised  stand- 
ards, nor  was  any  attempt  made  to  distinguish  between  the  basic 
causes  underlying  variations  in  production,  namely: 


207 

(a)  Due  to  the  number  of  possible  working  days  in  the 

month  varying  from  the  standard  working  days  in 
the  standard  month 

(b)  Due  to  the  idleness  of  a  department  or  of  the  plant  as  a 

whole 

(c)  Due  to  the   production  of  the   department   or  plant, 

when  operating,  varying  from  the  standard  produc- 
tion for  the  operating  time 
The  letters  A,  B,  and  C  bear  the  same  significance  in  both 
chapters.     The  letter  D  as  used  in  the  preceding  chapter  cor- 
responds to  the  use  of  the  letter  H  in  this  chapter. 

The  numbers  i  to  Jj  are  used  to  indicate  the  various  divisions 
of  cost  variation  analysis  as  follows: 

/  The  variation  in  total 

2  The  variation  due  to  the  revision  of  the  standard 

5  The  variation  due  to  the  use  of  an  alternate  standard 

4  The   variation   in  cost   resulting   from   the  number  of 

working  days  in  the  month  being  more  or  less  than 
the  number  of  working  days  in  the  standard  month 
used  as  a  basis  for  figuring  standard  cost 

5  The  variation  in  cost  owing  to  idle  time 

6  The  variation  due  to  the  production  per  day  or  hour 

being  more  or  less  than  standard 

7  The  variation  due  to  fluctuations  in  rates  of  pay 

8  The  variation  due  to  fluctuations  in  the  hours  worked 

as  compared  with  standard 
p  The  variation  due  to  differences  between  the  actual  and 
standard  price  paid  for  material 

10  The  variation  in  the  quantity  of  material  used 

11  The  variation  in  the  price  of  service  such  as  power, 

light,  etc. 

12  The  variation  in  the  quantity  of  service  consumed 
7J  The  variation  in  expense 

The  small  letters  p,  h,  c,  and  d  are  used  to  indicate  the  char- 
acter of  the  expense  being  dealt  with: 

p  indicates  an  expense  tending  to  vary  directly  with  the 
production  such  as  most  forms  of  producing  labor 

h  indicates  an  expense  which  is  in  the  nature  of  a  monthly 
fixed  charge  such  as  tlie  salary  of  a  superintendent,  or 
fire  insurance  premiums 


208 

c  indicates  an  expense  which  is  a  fixed  charge  per  working 
day  as,  for  instance,  a  time-keeper  paid  on  an  hourly 
basis 

d  indicates  a  fixed  charge  per  day  worked  as,  for  instance, 
a  cleaner  paid  an  hourly  rate  while  his  department  is 
working,  but  not  paid  if  his  department  is  not  operating 
even  though  the  rest  of  the  plant  is  working. 

The  small  letters  a  and  r  indicate  that  some  other  than  the 
basic  standard  is  being  used  as  a  means  of  determining  the  cur- 
rent operating  efficiency: 

a     indicates  that  an  alternate  standard  is  being  used 
r     indicates  that  a  revised  standard  is  being  used 
ra  that  a  revised  alternate  standard  is  being  used 

Table  3 1  gives  the  formulas  for  figuring  the  variations  in  total 
and  due  to  the  different  causes.  For  instance,  the  formula  given 
for  figuring  the  amount  of  the  increase  or  decrease  in  cost,  owing 
to  variations  in  the  actual  rates  of  pay  (See  Item  7,  Table  31), 
or  in  the  price  of  material  (See  Item  9,  Table  31),  as  compared 
with  standard  is  B — A.  As  explained  previously,  these  letters 
indicate  the  actual  time  or  material  expended  figured  at  the  actual 
price  and  the  actual  time  or  material  expended  figured  at  the 
standard  price,  so  that  the  formula  B — A  involves  the  following 
calculation:  Actual  expenditure  at  actual  price  less  actual  ex- 
penditure at  standard  price  equals  variation  due  to  change  in  rate 
or  price. 

In  view  of  the  fact  that  the  total  of  the  cost  variations  by 
causes  must  equal  the  total  variation  obtained  by  comparing 
the  total  actual  cost  with  the  value  of  the  production  figured  at 
standard,  it  follows  that  the  mathematical  calculation  involved 
is  a  simple  equation.  This  can  best  be  shown  by  giving  an  illus- 
tration as  follows: 

The  formula  given  in  Table  32  for  determining  and  analyzing 
the  variations  between  actual  and  standard  cost  in  the  case  of 
material  in  the  nature  of  a  fixed  monthly  charge  and  where  an 
alternate  standard  is  in  force,  is: 

I  =  3  +  4  +  5  +  6a  +  9  -^  loh 

Expressing  the  above  in  the  complete  form  given  in  Table  31 
gives  the  following: 

H-A=H-F+D-C+E-D+F-E+B-A+C-B 


209 

The  arithmetical  accuracy  of  the  equation  is  proven  by  match- 
ing the  various  elements  as  follows: 

H-A  =  H-F+D-C-VE-D+F-E-{-B-A+C-B* 

The  following  example  illustrates  the  actual  method  of  using 
Tables  31  and  32: 

Character  of  Expense:  Foreman  paid  for  every  working  day 
in  the  month  whether  his  department  is  operating  or  not. 

Class  of  Expense:  Fixed  charge  per  working  day,  Class  (ci). 

Standard  Used  for  Determining  Operating  Efficiency:  Re- 
vised. 

Formula  per  Table  32:  i  =  2-\-^-\-6r  +  y-\-8c 

(see  asterisk  on  this  table). 
Formula  Expanded  to  Terms  of  Table  31 : 

H-A=H-G+E-D^G-E+B-A-\-D-B 

Standard  Data 

Standard  working  days  in  month 25 

Standard  pay  per  day .• .  .  $5.00 

Standard  pay  per  standard  month $125.00 

Standard  production,  tons 250 

Standard  cost  per  ton $0.50 

Revised  Standards 

Production  per  standard  month,  tons 312.50 

Revised  standard  cost  per  ton $0.40 

Assumed  Actual  Case 

Working  days  in  the  month 23 

Days  department  worked 21 

Foreman's  pay  (raised  to)  per  day $6.00 

Production,   tons    260 

Comparative  Data 

A  Actual  at  actual:  23  days  at  $6.00 $138.00 

B  Actual  at  standard:  23  days  at  $5.00 $115.00 

C  Standard  cost  for  standard  month  as  above  $125.00 
D  Standard  cost  for  actual  working  days  in 
month:  23  days— 23/25ths  of  $125.00 
(C)    $115.00 

•This   equation   should   be   written   with   a   cancellation   mark   through   each   item. 


2IO 


E  Standard  cost  for  days  worked  in  depart- 
ment:   21    days — 2i/25ths    of   $125.00 

(C)    $105.00 

G  Revised  standard:  260  tons  at  $0.40 $104.00 

H  Basic  or  accounting  standard:  260  tons  at 

$0.50 $130.00 

Comparisoiis 

1  Comparison     in     total 

{H-A) $130.00 

$138.00  $8.00* 

2  Variation  due  to  revi- 

sion    of     standards 

{H-G)   $130.00 

$104.00     $26.00 

5  Variation   due    to    idle 

time  (department 
was  closed  down 
during  two  working 

days)    (E-D)    $105.00 

$115.00     $10.00* 

6  Variation  due  to   pro- 

duction per  day  ac- 
tually worked  being 
less     than     standard 

{G-E)    $104.00 

$105.00       $1.00* 

7  Variation  due  to  change 

in  rates  of  pay  {B-A)   $115.00 

$138.00     $23.00* 
10  Variation   due   to   dif- 
ference  between   ac- 
tual   hours    per    day 
worked  and  standard 

{D-B)    $115.00 

$115.00 
Totals $8.00*     $8.00* 


Item  2  above  would  be  omitted  on  operating  efficiency  state- 
ments, the  data  on  these  being  normally  confined  to  showing 
variations  between  the  actual  cost-  and  the  current  operating 
standard,  in  this  case  the  latter  being  the  revised  standard.     The 


information  which  would  appear  on  the  r)pcrating  efficiency 
statement  in  respect  to  the  example  heing  dealt  with  would  he 
as  follows : 

Actual  cost $138.00 

Standard  cost  (revised)    $104.00       $34.00* 

Analysis  of  above  increase: 

Idle   time    $10.00* 

Production  efficiency    $1.00* 

Rates $23.00*     $34.00* 

*  Asterisk    indicates    red   figures   signifying   increase. 

Further  illustrations  of  the  use  of  these  tables  are  given  later. 

The  Purpose  of  Dual  Comparisons 

From  the  illustration  given  above  it  will  be  noted  that  what- 
ever the  current  cost  standard  may  be  (whether  alternate, 
revised  basic  or  revised  alternate)  comparisons  of  actual  costs 
under  the  plan  followed  are  invariably  made  w?ith  both  this 
current  standard  and  the  basic  standard.  As  the  advantage  of 
using  both  the  basic  and  current  standards  may  be  questioned, 
a  word  of  explanation  as  to  this  would  seem  in  order.  In  mak- 
ing the  dual  comparison  provided  for,  two  purposes  are  served: 

1  All  costs  being  showai  in  relation  to  the  base  or  original 

standard,  it  follows  that  statements  that  can  be  com- 
pared with  the  same  thing  can  be  compared  with  one 
another,  so  that  however  many  changes  in  standards 
may  have  been  made  in  the  interim  between  two  state- 
ments comparisons  can  readily  be  made  between  them. 

2  From  the  standpoint  of  accounting  technique  it  is  highly 

desirable  that  the  cost  system  in  force  should  not 
demand  the  amendment  of  a  multitude  of  detailed 
standard  costs  in  order  to  reflect  changes  in  standards 
introduced  to  conform  with  current  operating  condi- 
tions. 

All  industrial  engineers  will  appreciate  the  value  of  a  plan 
which  provides  for  systematically  taking  up  in  the  accounts 
revisions  in  standards.    As  Mr.  Emerson  states:  "Staff  standards 


212 

are  infinite  and  ever-changing.  The  best  practice  of  yesterday 
is  the  laughing  stocl<  of  to-day,"  and  the  author  calls  to  mind 
a  case  in  one  industry  where  changes  in  design  of  the  machinery 
manufactured  were  so  numerous  that  the  force  of  industrial 
engineers  employed  to  figure  the  standards  were  just  about  able 
to  hold  their  own  with  the  force  of  designers  figuring  changes. 
Ultimately  the  latter  won  out  and  the  industrial  engineers  with 
great  cheerfulness  transferred  their  efforts  to  a  field  of  action 
of  a  more  stabilized  character. 

Changes  in  standards  are  the  earmarks  of  progress.  It  is 
stated,  for  instance,  that  about  the  year  1500  soldiers  who  used 
guns  stood  in  files  37  deep;  the  reloading  of  the  weapons  occu- 
pied so  much  time  that  when  a  man  had  fired  he  passed  to  the 
rear  and  was  not  ready  to  fire  again  until  the  36  men  in  front 
of  him  had  discharged  their  weapons.  Allowing  two  seconds 
for  getting  out  of  one  another's  way  and  for  aiming  the  weapons, 
we  might  estimate  a  hundred  per  cent  efficiency  of  speed  in 
firing  in  those  days  as  30  shots  a  minute.  Comparing  this  with 
a  modern  machine  gun  firing  1200  rounds  a  minute,  we  have 
an  increase  in  efficiency  of  147,900  per  cent! 

As  an  instance  of  slow  continuous  raising  of  standards  there 
may  be  cited  that  of  the  gradual  increase  in  the  sugar  contents 
of  beet  root,  the  pounds  of  beet  root  rec[uired  to  obtain  a  hundred 
pounds  of  sugar  being  recorded  as  follows: 

Year  Pounds 

1836 1800 

1842 1600 

1857 1200 

1871 IIOO 

1894 750 

It  is  not  necessary  to  give  further  illustrations;  standards  are 
being  constantly  raised  by  the  improvement  of  equipment  and 
methods,  and  a  cost  system  based  on  the  use  of  standards  should 
most  certainly  provide  the  means  for  promptly  amending  the 
cost  records  to  reflect  such  adjustments  in  standards. 

In  spite  of  the  apparent  complexity  of  the  formulas  given,  in 
actual  practice  by  the  methods  formulated  by  the  author  their 
use  in  the  determination  and  analysis  of  cost  variations  from 
month  to  month  is  an  absolutely  mechanical  operation  which 
can  be  quickly  and  accurately  performed  by  the  ordinary  grade 
of  office  help. 


213 


The  facility  with  which  the  anth(ir  has  hccn  ahlc  to  apply  these 
formulas  to  meet  successfully  widely  varying  conditions  would 
seem  to  indicate  their  soundness  and  practicability,  and  he  ven- 
tures to  believe  that  in  these  and  similar  formulas  will  be  found 
the  key  to  the  solution  of  most  fundamental  cost  problems. 


Table  31.      Formula  to  Apply  in  the  Determination  and  Analysis  of 
Cost  Variations  for  the  Different  Classes  of  Expense 

(To  be  used  in  conjunction  with  Table  32) 


Charge 

Fixed 

Fixed 

Fixed 

Varying 

Charge 

Charge  per 

Charge  per 

Division  of  Cost 

with 

per 

Working 

Day 

Production 

Month 

Day 

Worked 

iP) 

{b) 

(c) 

(d) 

I 

Comparison  in  Total .  .  . 
Standard  Variations 

H-A 

H-A 

H-A 

H-A 

2 

Revised  standard .... 

H-G 

H-G 

H-G 

H-G 

(ar)  F-G 

(ar)  F-G 

(ar)  F-G 

(ar)  F-G 

3 

Alternate  standard. . . 
Production  Variations 

H-F 

H-F 

H-F 

H-F 

4 

Working  days 

D-C 

5 
6 

Idle  time 

E-D 
H-E 

E-D 
H-E 

Daily  production .... 

H-E 

(a)  F-E 

(a)  F-E 

(a)  F-E 

(ar  &  r)  G-E 

(ar  &  r)  G-E 

(ar&r)  G-E 

Labor  Vari.vtions 

7 

Rates 

B-A 

B-A 

B-A 

B-A 

8 

Time 

Material  Variations 

(p)  H-B 

(a)  F-B 

(ar  8z  r)  G-B 

(b)  C-B 

(c)  D-B 

(d)  E-B 

Q 

Price 

B-A 

B-A 

B-A 

B-A 

JO 

Quantity 

Service  Variations 

(p)  H-B 

(a)  F-B 

(ar  &  r)  G-B 

(b)  C-B 

(c)  D-B 

(d)  E-B 

ij 

Price 

B-A 
(p)  H-B 

B-A 

(b)  C-B 

B-A 
(c)  D-B 

B-A 

12 

Quantity 

(d)  E-B 

(a)  F-B 

(ar  &  r)  G-B 

Expense  Variations 

13 

Amount 

(P)  H-A 
(a)  F-A 

(b)  C-A 

(c)  D-A 

(d)  E-A 

(ar  &  r)  G-A 

214 


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215 

Additional  Illustrations  of  Uses  of  Tables  31   and  32 

Illustration  2 

Class   h  Expense;  Fixed  Monthly   Charge;  Revised  Standard 

Character  of  expense,  foreman  paid  fixed  monthly  salary. 
Class  of  expense,  fixed  monthly  charge  (Class  b-i). 
Standard  used  for  determining  operating  efficiency  (revised). 
Formula  per  Table  32:  i  =2 +4 +5 +($;'  +  / +56 
Above  formula  expanded  to  terms  of  Table  31: 

H-A  =H-G+D-C+E-D^-G-E-\-B-A  +C-B 

Standard  Data 

Standard  working  days  in  month 25 

Standard  pay  per  month $125.00 

Standard  production,  tons 250 

Standard  cost  per  ton $0.50 

Revised  Standard 

Production,  tons 312.5 

Standard  cost  per  ton $0.40 

Assumed  Actual  Case 

Working  days  in  month 23 

Days  actually  worked 21 

Foreman's  salary  raised  to $150 

Production,    tons    260 

Coniparatire  Data 

A  Actual  at  actual   $150.00 

B  Actual  at  standard $125.00 

C  Standard  cost  for  standard  month  as  above  $125.00 
D  Standard  cost  for  actual  working  days 

23 

—  times  125.00 $115.00 

25 
E  Standard  cost  for  days  actually  worked 

21 

—  times  125.00 $105.00 

25 


2l6 

Standard  Cost  for  Actual  Production 

G  Revised  standard  260  tons  at  $0.40 $104.00 

H  Basic  or  accounting  standard  260  tons  at 

$0.50 $130.00 

Comparisons 

1  Total,  H-A   130.00-150.00 $20.00* 

2  Standard  revision,   H-G   130.00-104.00...   $26.00 

4  Working  days,  D-C  1 15.00-125.00 $10.00* 

5  Idle  time,  E-D   105.00-1 15.00 $10.00* 

6  Production  efficiency,  G-E  104.00-105.00.  .      $1.00* 

7  Rate  variations,  B-A  125.00-150.00 $25.00* 

8  Time,  C-B  125.00-125.00 

*Indicates  red  figure  signifying  increase. 

Illustration  3 

Class    d   Expense;    Fixed    charge    per   day    zvorked;   Revised 
Standard 

Character  of  expense,  foreman  paid  by  the  day  for  every  day 

his  department  is  working. 
Class  of  expense,  fixed  charge  per  day  worked,  labor  (d-i). 
Standard  used  for  determining  operating  efficiency  (revised). 
Formula  per  Table  32:  i  =2-]-6r-\-'/-\-8d. 
Above  formula  expanded  to  terms  of  Table  31: 

H-A  =H-G-^G-E-{-B-A-\-E-B. 

Standard  Data 

Standard  working  days  in  month 25 

Standard  pay  per  day $5-00 

Standard  pay  per  standard  month $125.00 

Standard  production,  tons 250 

Standard  cost  per  ton $0.50 

Revised  Standards 

Production,  tons 312.5 

Standard  cost  per  ton $0.40 

Assumed  Actual  Case 

Working  days  in  month 23 

Days  department  worked 21 

Foreman's  wages  raised  to $6.00 

Production,  tons    260 


217 

Comparative  Data 

A  Actual  at  actual $126.00 

B  Actual  at  standard  21  days  at  $5.00 $105.00 

C  Standard  cost  for  standard  month $125.00 

D  Standard  cost  for  actual  working  days...  $115.00 
E  Standard  cost  for  days  worked  in  depart- 
ment    $105.00 

Standard  Cost  for  Actual  Production 

G  Revised  standard  260  tons  at  $0.40 $104.00 

H  Basic  or  accounting  standard  260  tons  at 

$0.50 $130.00 

Comparisons 

1  Total  {H-A)  $130.00 

$126.00  $4.00 

2  Standard  revision       (H-G)  $130.00 

$104.00  $26.00 

6  Production  efficiency  (G-E)  $104.00 

$105.00     $1.00* 

7  Rates  (B-A)  $105.00 

$126.00  $21.00* 

8  Time  (E-B)  $105.00 

$105.00   

Totals  $4.00     $4.00 

^Indicates  red  figure  signifying  increase. 

Illustration  4 

Class  b  Expense;  Fixed  Monthly  Charge;  Alternate  Standard 

Character  of  expense,  material  used  in  repairs  of  equipment. 

Class  of  expense,  fixed  monthly  charge  (b-2). 

Standard  used  for  determining  operating  efficiency  (alternate). 

Formula  per  Table  32:  i  =j-{-4+j-{-6a+Q  +  iob. 

Above  formula  expanded  to  terms  of  Table  31: 

H-A  =H-F-\-D-C+E-D+F-E-\-B-A  +C-B 

Standard  Data 

Standard  material  per  month  of  25  days $250.00 

Standard  production,  tons 5'°^° 

Standard  material  cost  per  ton $0.05 

Alternate  Standard 

Standard  material  per  month  of  25  days $400.00 

Standard  production,   tons 4,000 

Standard  material  cost  per  ton $0.10 


2l8 

Assumed  Actual  Case 

Working  days  in  month 23 

Plant  operating,   days 20 

Material  used  at  standard  price $300.00 

Material  used  at  actual  price $350.00 

Production,   tons    2,800 

Comparative  Data 

A  Actual  at  actual   $350-00 

B  Actual  at  standard $300.00 

C  Alternate  standard  for  standard  month .  .  .    $400.00 
D  Alternate  standard  for  working  days 

23 

—  X   400 $368.00 

25 
E  Alternate  standard  for  days  worked 

20 

—  X  400 $320.00 

25 
F  Alternate  standard  cost — actual  production 

2,800  tons  at  $0.10 $280.00 

H  Basic    standard     cost — actual     production 

2,800  tons  at  $0.05 $140.00 

Comparisons 

I  In  total  (H-A)  $140.00 

350.00  $210.00* 

J  Variation  in  standards 

(H-F)      140.00 
(difference    between    280.00  $140.00* 
basic    and    alternate 
standard) 

4  Working  days     (D-C)     368.00 

400.00       32.00* 

5  Idle  time  (E-D)     320.00 

368.00       48.00* 

6  Production       efficiency 

(F-E)      280.00 

320.00       40.00* 
p  Price  (B-A)      300.00 

350.00       50.00* 
10  Quantity  {(^-B)     400.00 

300.00     100.00 
Totals  $210.00*  $210.00* 

*Indicates  red  figure  signifying  increase. 


219 

Illustration  5 

Class  b  Expense;  Fixed  Monthly  Charge;  Revised  Alternate 
Standard 

Character  of  expense,  material  used  in  repairs  of  equipment. 

Class  of  expense;  fixed  monthly  charge  {b-2). 

Standard  used  for  determining  operating  efficiency   (revised 

alternate  standard). 
Formula  per  Table  32:  i  =2ar-\-3-\-4-{-j-{-6ar-\-g  +  iob. 
Above  formula  expanded  to  terms  of  Table  31 : 

H-A  =-F-G+H-F+D-C+E-D+G-E+B-A+C-B 

Standard  Data 

Standard  material  per  month  of  25  days.  .  .  .   $250.00 

Standard  production,   tons 5,000 

Standard  material  cost  per  ton $0.05 

Alternate  Standard 

Standard  material  per  month  of  25  days $400.00 

Standard  production,  tons 4,000 

Standard  material  cost  per  ton $0.10 

Revised  Alternate  Standard 

Standard  material  per  month  of  25  days.  .  .  .   $360.00 

Standard   production,   tons 3,000 

Standard  material  cost  per  ton $0.1  :r 

Assumed  Actual  Case 

Same  as  previous  illustration,  i.e.: 

Working  days  in  month 23 

Plant  operating,   days 20 

jMaterial  used  at  standard  price $300.00 

Material  used  at  actual  price $350.00 

Production,  tons 2,800 

Comparative  Data 

A  Actual  at  actual $350.00 

B  Actual  at  standard $300.00 

C  Revised  alternate  standard  cost  for  stand- 
ard month $360.00 

D  Revised  alternate  standard  cost  for  work- 
ing days  in  month 

—  X  360,00  (C  above) $331.20 

25 


220 

E  Revised  alternate   standard  cost   for   days 
worked 
20 
—  X   360.00   (C  above) $288.00 

25 

F  Alternate  standard  cost  of  month's  produc- 
tion 
2,800  tons  at  $0.10 $280.00 

G  Revised  alternate  standard  cost  of  month's 
production 
2,800  tons  at  $0.12 $336.00 

H  Basic  standard  cost  of  month's  production 

2,800  tons  at  $0.05 $140.00 

Comparisons 

1  In  total  {H-A)   $140.00 

350.00  $210.00* 

2  Variation  in  standards 

(F-G)      280.00 
(difference    between     336.00  $56.00* 
alternate  and  revised 
alternate    standards) 
5  Variation  in  standards 

(H-F)      140.00 
(difference    between     280.00   140.00* 
basic    and    alternate 
standards) 
'4  Working  days     (D-C)      331.20 

360.00     28.80* 

5  Idle  time  (E-D)     288.00 

331.20     43.20* 

6  Production  efficiency 

(G-E)     336.00 

288.00     48.00 
p  Material  price     {B-A)     300.00 

350.00     50.00* 
10  Material  quantity  360.00 

(C-B)      300.00     60.00 
Totals  $210.00*  $210.00* 

*Indicates  red  figure  signifying  increase. 


Chapter  XI 
THE    FUTURE    OF    COST    ACCOUNTING 

WHATEVER  other  reasons  accountants  may  have  to  offer 
for  their  faihire  to  bring  cost  accounting  methods  into 
Hne  with  modern  developments  in  the  industrial  field  generally, 
they  certainly  cannot  claim  that  attention  has  not  been  drawn 
to  the  shortcomings  and  absurdities  of  what  must  still  be  re- 
garded as  the  established  methods. 

Ten  years  ago  Mr.  Harrington  Emerson  presented  a  clear 
and  convincing  indictment  of  retrospective  cost  accounting 
methods.     At  that  time  he  wrote  as  follows: 

There  are  two  radically  different  methods  of  ascertaining  costs :  the 
first  method,  to  ascertain  them  after  the  work  is  completed;  the  second 
method,  to  ascertain  them  before  the  work  is  undertaken.  The  first  method 
is  the  old  one,  still  used  in  most  manufacturing  and  maintenance  under- 
takings, the  second  method  is  the  new  one,  beginning  to  be  used  in  some 
very  large  plants,  where  its  feasibility  and  practical  value  have  already 
been  demonstrated. 

The  objections  to  the  old  method  are  not  only  that  it  delays  information 
until  little  value  is  left  in  it,  but  that  it  is  wholly  and  absolutely  incorrect, 
mixing  up  with  costs  incidents  that  do  not  have  the  remotest  direct 
connection  with  them,  so  that  analysis  of  cost  statements,  as,  for  instance, 
repair  costs  per  locomotive  mile,  does  not  lead  to  elimination  of  wastes. 
The  advantages  of  the  second  method  are  not  only  that  the  costs  must 
be  ascertained  before  the  work  is  begun,  but  that  costs  as  finally  tabulated 
are  the  real  costs  divided  as  to  each  unit,  whether  a  single  element  or 
aggregated  out  of  a  million  separate  elements  (i)  into  standard  expense 
and  (2)  into  avoidable  loss.  An  analysis  of  costs  so  stated  facilitates  an 
almost  inexorable  elimination  of  inefficient  conditions  of  all  kinds,  standard 
expenses  being  constantly  standardized  at  new  levels — wastes,  the  excess 
above  standard  costs,  being  constantly  removed. 

Another  engineer  who  has  drawn  attention  to  the  falsity  of 
the  usual  methods  of  cost  accounting  was  the  late  ]\Ir.  H.  L. 
Gantt.  In  criticizing  the  common  methods  under  which  no  dis- 
tinction is  made  between  legitimate  costs  of  production  and  those 
due  to  inefficiency  and  idleness  he  states: 

Few  of  our  business  men  have  ever  known  what  it  costs  to  produce 
an  article.     They  are  the  victims  generally  of  a  false  cost-keeping  system. 

221 


\\'hen  an  accountant  wants  to  figure  the  cost  of  an  article  one  of  the 
first  things  he  does  is  to  throw  in  all  the  "overhead."  Even  though  ninc- 
tenths  of  the  plant  is  absolutely  idle  loo  per  cent  of  the  whole  investment 
is  charged  to  the  "cost  of  production."  This  is  altogether  misleading.  If 
I  rent  two  apartments  in  New  York  City  at  $ioo  a  month  each,  then  live  in 
one  and  keep  the  other  closed,  I  cannot  honestly  claim  that  it  costs  me 
$200  a  month  for  a  place  to  sleep. 

All  our  accounting  systems  should  contain  another  column,  one  showing 
the  losses  incurred  through  shutdowns,  strikes,  the  idleness  of  any  part 
of  the  plant,  experiments  that  do  not  work,  failure  to  get  supplies,  anj-thing 
and  everything  which  is  not  rightfully  chargeable  to  the  actual  process 
of  production.  In  one  column,  then,  the  actual  cost  of  production  would 
appear;  in  the  other  the  manufacturer  could  see  at  a  glance  the  tremendous 
cost  of  non-production  and  would  be  anxious  to  repair  the  leak.  The 
reason  he  doesn't  repair  it  oftener  to-day  is  that  his  accountants  have 
covered  it  up  with  pretty  figures. 

As  Mr.  Gantt  suggests,  the  first  step  toward  correcting  an 
inefficiency  is  to  determine  its  existence — in  fact,  as  ]\Ir.  Walter 
H.  Polokav  states: 

An  accurate  knowledge  of  the  excess  of  expenses  over  the  necessary 
cost  of  production  leads  almost  inevitably  to  the  discovery  of  means  for 
eliminating  this  waste. 


Our  Lack  of  Accounting  Methods 

Though  Mr.  Emerson  and  other  engineers  liave  reaUzed  very 
fully  the  defects  in  the  usual  cost  accounting  methods  and  have 
clearly  foreseen  the  direction  which  cost  accounting  in  the  future 
must  surely  follow,  it  must  be  admitted  that  they  have  given 
very  little  detailed  information  as  to  the  methods  to  be  adopted 
to  realize  the  results  demanded.  Apparently  they  have  not  fully 
realized  that  the  application  of  their  principles  involves  a  com- 
plete revolution  iti  accounting  thought  and  technic^ue  and  re- 
cpires  a  drastic  readjustment  of  ideas  on  the  part  of  accountants 
as  to  the  fundamental  principles  of  cost  accounting.  It  is  to  be 
greatly  regretted  that  the  engineering  and  accounting  professions 
have  delayed  so  long  in  combining  forces  toward  the  elimination 
of  what  is  probably  the  most  serious  defect  in  the  industrial 
machine  of  to-day. 

The  author  ventures  to  believe  that  in  this  volume  he  has 
described  methods  which  represent  the  practical  application  of 
the  ideas  advanced  in  the  quotations  given,  and  these  methods 
indicate  at  least  in  a  measure  the  path  to  be  followed  in  order 


223 

to  release  the  industrial  world  from  the  shackles  of  the  cumber- 
some and  inefficient  methods  of  cost  accounting  which  are  still 
inflicted  on  the  long  suffering  manufacturer.  A  consideration 
of  the  methods  illustrated  in  preceding  chapters  will  clearly 
demonstrate  how  closely  the  results  obtained  by  tlieir  use  parallel 
those  called  for  by  Mr.  Emerson  when  he  wrote: 

When  a  simple  system  of  stating  all  costs — whether  for  a  single  task 
for  man  or  machine,  or  for  all  a  man's  work  for  any  period,  or  for  all 
the  work  of  a  gang  or  department,  or  for  a  whole  plant — is  available; 
when  this  system  permits  parallel  statement  of  actual  and  standard  costs — 
then  the  whole  problem  is  well-nigh  solved,  patience,  persistence,  fidclit}^ 
and  high  ideals  accomplishing  the  results,  through  the  use  of  staff  specialists. 

Mr.  Gantt's  desire  for  a  system  of  cost  accounting  which  will 
show  in  one  column  actual  costs  of  production  and  in  another 
costs  of  non-production  is  also  met  in  the  plans  described,  for 
in  the  manufacturing  efficiency  statements  illustrated  the  effect 
of  non-production  is  clearly  and  unmistakably  shown  by  the  red 
figures  which  indicate  increases  in  costs  as  compared  with 
standard. 

In  addition,  however,  to  meeting  the  demands  of  the  operating 
division  by  furnishing  complete  information  relative  to  costs 
and  efficiencies,  a  properly  designed  system  of  predetermined 
costs  is  of  inestimable  value  to  other  divisions  of  the  business, 
particularly  that  of  sales. 


The   Impossibility   of    Providing   Reliable    Current 
Information  by  Retrospective  System 

It  is  hardly  an  exaggeration  to  say  that  in  concerns  manufac- 
turing a  complex  product  and  operating  retrospective  systems 
of  cost  accounting  the  sales  manager  is  rarely  ever  provided 
with  reliable  information  relative  to  current  costs  of  manu- 
facture. In  the  case  of  a  concern  manufacturing  machinery 
where  the  operations  involved  in  the  manufacture  of  the  parts 
incorporated  in  the  machines  finished  in  any  month  have  ex- 
tended over  many  months  previous,  the  costs  submitted  by  the 
cost  department  represent  not  the  current  cost  of  building  these 
machines  but  a  composite  of  several  months'  costs,  and  in  times 
of  fluctuating  prices  of  material  and  labor  such  costs  are  likely 
to  be  distinctly  misleading,  to  say  the  least.  Under  the  methods 
described  by  the  author,  however,  it  is  possible  to  furnish  on 


224 

demand  at  any  time  a  closely  approximate  current  cost  of  any 
machine,  even  though  it  may  consist  of  a  thousand  or  more 
parts  and  involve  ten  thousand  detail  operations,  and  this  with- 
out requiring  revision  of  the  detailed  cost  figures. 

A  further  valuable  feature  presented  by  properly  developed 
systems  of  predetermined  or  standard  costs  is  the  means  afforded 
by  their  use  of  obtaining  the  most  complete  information  relative 
to  profits  made  on  sales,  and  some  illustrations  have  been  given 
in  earlier  chapters  in  connection  with  this.  The  manufacturer 
of  a  varied  product  whose  cost  department  provides  him  with 
reliable  and  comprehensive  information  as  to  his  profits  by  lines, 
by  salesmen,  by  territories  and  by  classes  of  customers  is  the 
rare  exception  and  not  the  rule,  and  it  needs  no  very  special 
gift  of  prophecy  to  foresee  that  the  time  is  fast  approaching 
when  sales  executives  will  demand  that  their  cost  departments 
furnish  them  with  information  which  will  enable  them  to  con- 
duct their  business  on  the  foundation  of  accurate  information 
in  place  of  guesswork  or  the  judgment  of  competitors  equally 
in  the  dark  as  to  actual  facts. 


The  Coordination  of  Accounting  and  Planning 

An  additional  and  valuable  feature  of  standard  costs  is  in 
connection  with  their  coordination  with  the  scientific  planning 
and  dispatching  of  work  through  the  shops,  a  properly  designed 
system  of  standard  or  predetermined  costs  not  only  enabling 
the  cost  department  records  to  reflect  the  results  obtained  by 
the  planning  department  but  also  rendering  it  possible  for  both 
departments  to  coordinate  their  routine  work  to  their  mutual 
benefit.  In  Figures  9  to  12  (Chapter  V)  and  Figures  13  to 
16  (Chapter  VI)  there  was  illustrated  a  coordinated  cost,  plan- 
ning, and  production  system  to  meet  complex  conditions,  under 
which  the  scientific  planning  and  dispatching  of  work  is  ab- 
solutely coordinated  with  the  scientific  determination  of  costs, 
with  the  result  that  duplication  of  work  is  eliminated  and  the 
cost  and  planning  records  so  dovetailed  and  harmonized  that 
reference  can  be  made  from  one  to  the  other  with  facility.  Under 
such  a  coordinated  system  the  planning  records  provide  an  inter- 
pretation of  the  causes  underlying  inefficiencies  disclosed  by  the 
cost  records,  and  the  latter  being  expressed  in  terms  common 
to  both  cost  and  planning  departments  are  of  material  assistance 
to  the  planning  supervisor  in  adding  significance  to  the  informa- 


225 

tion  appearing  on  his  own  records  by  expressing  these  in  terms 
of  dollars  and  cents. 

An  outstanding  defect  of  the  average  planning  and  production 
system  introduced  by  engineers  is  the  disregard  of  the  importance 
of  coordinating  the  planning  and  costing  functions  and  the  entire 
separation  from  the  cost  system  of  many  otherwise  admirable 
planning  systems  when  these  should  logically  be  combined  can- 
not fail  to  reduce  the  effectiveness  of  both  systems  as  well  as 
to  involve  duplication  of  effort  and  excessive  expense.  A  system 
of  predetermined  costs  involves  the  use  of  standards  of  material 
quantities  and  of  time,  both  of  men  and  machines,  and  these 
standards  should  also  be  common  to  those  used  by  the  planning 
department.  Unless  this  is  so,  unnecessary  expense  will  be  in- 
volved in  maintaining  separate  records  of  standards  and  in  addi- 
tion there  will  be  confusion  between  the  cost  and  planning 
records  owing  to  their  lack  of  uniformity. 

The  time  for  establishing  coordination  between  the  cost  and 
planning  methods  is  at  their  inception,  for  unless  the  designers 
of  the  planning  system  have  in  mind  the  ultimate  coordination 
of  this  system  with  the  costs  and  provide  for  this  in  their  plans, 
to  obtain  the  full  benefits  which  should  be  derived  from  such 
coordination  w'ill  demand  extensive  revision  of  established 
methods,  this  involving  the  dual  task  of  first  forgetting  the  old, 
and  second,  learning  the  new. 


Elasticity  in  Cost  Accounting 

Reference  has  previously  been  made  to  the  lack  of  elasticity 
in  the  average  cost  system,  information  on  the  cost  records  being 
so  compiled  as  to  render  it  of  little  use  except  to  meet  the  par- 
ticular need  for  which  it  was  originally  compiled.  The  author 
in  his  work  of  substituting  methods  of  cost  predetermination  for 
systems  of  retrospective  cost  accounting  frecjuently  finds  cases 
where  cost  information  over  a  few  wrecks  old  is  practically  value- 
less. He  recently  inspected  a  cost  system  of  a  company  where 
tens  of  thousands  of  cost  cards  w^ere  on  file,  but  as  these  did 
not  state  the  date  on  which  the  costs  were  compiled  it  was  not 
possible  to  ascertain  whether  they  were  figured  when  wages 
w^ere  on  a  pre-war  basis  or  during  the  period  of  abnormal  labor 
costs.  In  this  case  only  the  total  labor  was  shown,  as  for  in- 
stance, "planing  $1.75,"  no  hours  being  given. 

In  another  case  where  the  product  manufactured  w-as  of  a 


226 

complex  character,  a  finished  article  comprising  a  dozen  or  more 
parts,  not  only  were  the  quantities  and  prices  of  the  material 
omitted,  but  material  costs  were  shown  in  total  for  all  of  the 
parts  comprising  the  article,  a  similar  method  being  followed 
in  connection  with  labor  costs. 

It  is  a  fundamental  principle  in  the  methods  employed  by  the 
author  that  all  costs  should  be  so  compiled  that  they  can  be 
adjusted  to  the  basis  of  current  conditions  with  facility.  Under 
these  methods  it  is  not  necessary  to  refigure  the  detailed  costs 
of  the  thousand  or  more  parts  entering  into  the  standard  cost 
of  a  machine  in  order  to  adjust  this  cost  to  the  basis  of  current 
material,  labor  and  burden  rates.  When  a  change  in  methods 
of  manufacture  results  in  the  substituting  of  parts  or  the  elimina- 
tion or  changing  of  operations  it  is  necessary  to  revise  the 
standard  costs  to  conform  to  this  change,  but  this  is  a  different 
matter  to  requiring  the  refiguring  of  some  ten  thousand  detailed 
costs  owing  to  a  change  in  the  wage  scale  or  an  increase  in  the 
price  of  grey-iron  castings. 


The  Advantages  of  Standard  Costs 

A  number  of  illustrations  have  been  given  in  the  preceding 
chapters  of  the  value  of  standard  costs  in  bringing  cost  informa- 
tion to  a  focus — of  showing  in  one  figure  how  the  costs  of  the 
whole  plant  for  a  period  compare  with  standard.  A  further 
advantage  previously  referred  to  is  in  connection  with  bring- 
ing to  a  uniform  basis  efficiency  statements  compiled  at  different 
times  and  in  comparison  with  varying  standards. 

Obviously,  standards  are  constantly  changing.  As  Mr.  Emer- 
son states:  "Staff  standards  are  infinite  and  ever-changing.  The 
best  practice  of  yesterday  is  the  laughing  stock  of  to-day."  But 
a  great  proportion  of  the  value  of  efficiency  information  com- 
piled is  lost  if  there  is  no  way  of  showing  the  costs  of  to-day 
in  comparison  with  the  standards  of  yesterday.  Under  the 
method  illustrated  in  Figure  22  in  addition  to  showing  actual 
costs  in  relation  to  adjusted  standards  these  are  also  shown  in 
relation  to  a  base  standard,  so  that  efficiency  data  compiled  at 
any  time  is  always  comparable  with  that  compiled  at  any  other 
time. 

It  is  a  well-known  fact  that  specialists  are  in  a  degree  apt  to 
lose  their  sense  of  relative  values  and  to  lay  undue  emphasis 
on  the  importance  of  the  sphere  in  whioii  their  interests  are  in 


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227 

the  main  confined,  and  die  statements  of  engineers  supportinj,^ 
the  contention  of  the  author  that  inefficient  cost  accounting 
methods  are  a  serious  drain  on  industrial  hfe  have  been  quoted, 
with  the  hope  that  to  some  extent  at  least  they  will  offset  the 
suggestion  that  as  a  result  of  too  long  contemplation  of  cost 
accounting  problems  the  author  attaches  too  much  importance 
to  this  field  of  effort.  The  author  does  not  contend  that  solution 
of  all  industrial  problems  will  be  found  in  the  introduction  of 
efficient  methods  of  cost  accounting,  but  he  does  believe  with 
Mr.  B.  A.  Franklin  that  the  installation  of  adequate  methods 
of  cost  accounting  is  the  basic  and  fundamental  factory  improve- 
ment, and  claims  further  that  inadec{uate  methods  of  cost 
accounting  are  a  serious  handicap  also  to  both  the  sales  and 
financial  divisions  of  a  business.  The  successful  operation  of 
a  ship  demands  many  things  over  and  above  the  ability  to 
determine  the  position  of  the  vessel  at  any  given  time,  but  effi- 
ciency in  the  engine  room  will  be  of  little  moment  if  through 
poor  navigation  the  ship  is  run  upon  a  rock,  and  an  adequate 
system  of  cost  accounting  is  the  only  medium  through  which 
the  exact  position  of  a  business  can  be  continuously  and  correctly 
determined. 


The  Coming  Revolution  in  Cost  Accounting 

If  the  author  is  correct  in  his  contention  that  the  retrospective 
systems  of  cost  accounting  which  are  followed  in  the  great 
majority  of  manufacturing  institutions  are  totally  unfitted  to 
meet  the  legitimate  demands  of  the  modern  executive  it  would 
seem  reasonable  to  suppose  that  we  are  on  the  eve  of  a  widespread 
revolution  in  cost  accounting  methods,  for  once  the  movement 
toward  the  introduction  of  better  methods  of  accounting  becomes 
at  all  general  no  manufacturer  wdio  expects  to  hold  his  own  will 
be  able  to  afford  to  retain  accounting  methods  greatly  inferior 
to  those  of  his  competitors.  If  one  manufacturer  operates  on 
the  basis  of  precise  and  immediate  information  and  the  other 
without,  it  is  only  a  c{uestion  of  time  when  the  law  of  the  survival 
of  the  fittest  will  bring  the  latter  into  bankruptcy. 

Cost  accounting  requires  to  be  elevated  from  its  present  con- 
dition of  empiricism  to  that  of  a  science.  It  must  no  longer  be 
regarded  as  a  pleasant  relaxation  for  professional  accountants 
to  take  up  occasionally  when  the  pressure  of  financial  audits  and 
investigations  is  relieved.    The  design  of  systems  of  cost  account- 


228 

ing  to  meet  the  demands  of  modern  complex  business  demands 
specialized  knowledge  which  can  only  be  obtained  when  years 
of  practical  experience  are  added  to  a  natural  aptitude  for  this 
class  of  work. 


The  Opportunity  Before  Accountants 

Nature  in  her  law  of  the  survival  of  the  fittest  has  provided 
that  the  curve  of  evolution  should  be  an  ascending  one  and  no 
institution  can  permanently  continue  in  competition  with  one 
infinitely  more  efficient.  The  question  for  American  industry 
to  decide  to-day,  however,  is  whether  it  can  afford  to  wait  for 
a  gradual  evolution  toward  better  things,  w^hether  it  can  afford 
to  permit  the  blindness  of  its  accounting  advisers  to  remain  a 
drag  on  progress  at  a  time  when  we  need  to  strain  every  nerve 
to  render  our  leadership  in  the  world  of  business  secure.  The 
inefficiency  of  the  accepted  cost  accounting  methods  is  not  merely 
an  academic  problem,  it  is  not  restricted  to  the  counting  house 
or  to  conventions  of  public  accountants,  it  strikes  at  the  very 
roots  of  industrial  life.  It  is  a  serious  matter  that  at  a  time 
when  more  than  ever  before  we  need  coordinated  effort  in  all 
departments  of  business  we  find  so  important  a  division  as  that 
of  accounting  entirely  out  of  harmony  and  adjustment  with  the 
aim  and  purpose  of  business  in  general. 

These  transitional  times  offer  the  accounting  profession  a 
great  opportunity  and  a  great  responsibility.  What  is  required 
is  accounting  skill  combined  with  the  proper  viewpoint.  Of 
these  two  the  latter  is  the  more  important  and  it  is  this  the 
accountant  lacks.  If  he  should  fail  at  this  critical  time  to  adjust 
his  viewpoint  it  would  seem  inevitable  that  in  the  field  of  cost 
accounting,  at  least,  he  will  have  to  step  aside.  If  this  should 
happen,  however,  we  will  lose  vital  time,  for  as  many  an  engineer 
has  found  to  his  sorrow  the  requisite  training  in  the  application 
of  accounting  principles  cannot  be  acquired  in  a  limited  time, 
and  the  logical  leader  in  bringing  cost  accounting  into  line  with 
modern  industrial  thought  and  progress  is  the  professional  ac- 
countant. Though  not  primarily  directed  to  them,  accountants 
would  do  well  to  consider  this  message  from  the  pen  of  Glenn 
Frank,  in  his  recent  book  "The  Politics  of  Industry": 

Whenever  in  these  creative  moments  in  history  when  the  accustomed 
calm  and  conservation  of  the  popular  mind  has  been  broken  up  and  Society 
has  had  to  choose  between  trained  blind  men  and  untrained  men  of  vision, 


229 

Society  has  chosen  the  untrained  men  of  vision.  The  leader  whose  vision 
is  right  and  whose  purpose  is  sincere  will  acquire  the  training  in  time, 
W'hile  the  trained  man  who  persists  in  clinging  to  the  passing  order  is  a 
dead  weight.  But  there  is  no  final  reason  why  the  trained  leadership  ofi 
one  period  of  development  should  not  become  the  fittest  servant  of  the: 
next  period 

If  every  manufacturer  would  review  his  cost  accounting  sys- 
tem and  ask  himself  whether  it  fully  meets  requirements — 
whether  it  enables  him  to  learn  what  his  current  costs  of  produc- 
tion are,  where  and  to  what  extent  he  is  manufacturing  ineffi- 
ciently and  where  he  is  making  his  profits  and  where  not — the 
problem  would  soon  be  solved,  for  the  demand  for  improvement 
would  be  so  insistent  and  the  opportunities  for  skilled  cost  ac- 
countants so  great  that  this  field  would  attract  to  it  men  of 
calibre  of  a  par  to  that  now  required  by  the  engineering  and 
other  professions. 

There  is  no  real  justification  for  regarding  costs  solely  from 
the  retrospective  viewpoint,  and  the  development  of  cost  account- 
ing along  historical  lines  by  professional  accountants  is  due  to 
the  fact  that  most  of  the  work  undertaken  by  them  is  in  the 
nature  of  the  verification  of  past  records  and  the  investigation 
of  past  transactions. 

There  is  nothing  particularly  modern  in  the  basic  conception 
of  cost  predetermination.  Throughout  the  ages  it  has  been 
realized  that  the  path  of  wisdom  is  to  "look  before  you  leap" 
and  the  world  has  always  directed  a  special  scorn  towards  the 
man  who  started  to  build  a  mansion  and  whose  funds  petered 
out  before  the  undertaking  was  completed.  These  monuments  to 
lack  of  foresight  are  generally  pointed  out  to  enquiring  visitors 
under  some  such  contemptuous  title  as  "Smith's  Folly"  and  one 
can  well  imagine  the  subdued  laughter — prompted  by  the  recollec- 
tion of  some  half  finished  tower  mouldering  upon  a  neighboring 
hillside  of  that  audience,  some  two  thousand  years  ago,  when  it 
heard  these  words: 

For  which  of  you  intending  to  build  a  tower,  sittcth  not  down 
first,  and  counteth  the  cost. 


THE  END 


INDEX 


Accounting  Profession  and  Cost  Ac- 
counting, 2,  3 

—  Division,  Functions  in  Connection 

with  Cost  System,  37 
Accuracy  in  Accounting,  Obtained  by 
Eliminating  the  Personal 
Element,  20 

,  Illustrations      of      Careless 

Figuring  of  Costs,  146 
Analysis  of  Cost  Variations,  Unsatis- 
factory    Procedure     under     Usual 
Methods,  24,  100 
Alternate  Standards,  206 

Babson,   Roger  W.,   133 

Bonus  Systems,  Illustration  of  De- 
fective Plan,  27 

Bradford,  William,  no 

Burden  Distribution,  Absurdities  of 
Methods  Sometimes  Fol- 
lowed, 98 

,  General  Principles  of,  59,  97,  98 

,  Illustration  of  Error  Resulting 

from  Use  of  Departmental 
Rate,  61 

,  Increasing   Importance   of 

Proper  Methods,  60 

,  Standard  Labor  Versus  Stand- 
ard Rate  Per  Hour  for  Dis- 
tribution Purposes,  91 

Carnegie,  Andrew,  68 

Carpenter,  C.  U.,  24 

Causes  Versus   Costs,  62,  204 

Cooperation,   113,   115 

Coordinated  Systems,  Illustration  of 

(Figs.  9  to  16),  119 
Coordination,  Advantages  of,  117 

—  between     Cost     and     Production 

Departments,  18,  31,  119,  224 


Coordination  in  the  Average  Office, 
113 

— .Importance  of,  in  Accounting,  114 

Cost  of  Idleness.  See  Idleness, 
Cost  of. 

Cost  of  Sales,  for  Complex  Ma- 
chinery,   155 

,  for      Exceedingly      Varied 

Product,   159 

,  for  Simple  Product,  66,  153 

by  Salesmen,  174-177 

,  List  -  Less  -  Discount     Plan, 

160,   170 

"Cost-Plus"  Method,  41 

Cost  System,  Requirements  of.  See 
Requirements  of  Cost  System. 

Crane,  Dr.  Frank,  75 

Criticisms  of  Accepted  Methods  of 
Cost  Accounting,  Average  Cost 
System  not  More  than  50  per 
cent  Efficient,  i 

Criticisms  of  Accepted  Methods  of 
Cost  Accounting,  Description  and 
Criticism  of  Typical  Plan,  20-32 

Criticisms  of  Accepted  Alethods  of 
Cost  Accounting,  Difficulty  of  Mak- 
ing Comparisons,   182 

Criticisms  of  Accepted  Methods  of 
Cost  Accounting,  Impossibility  of 
Obtaining  Reliable  Current  Cost 
Data,  223 

Criticisms  of  Accepted  Methods  of 
Cost  Accounting,  Lack  of  Elastic- 
ity, 225 

Current  Costs,  Difficulty  of  Obtain- 
ing These  under  Usual 
Methods,  23,  223 

,  Illustration     of     Methods     of 

Determining  imder  Simple 
Standard  Cost  System,  66 


231 


232 


Current  Costs,  Obtaining  Current 
Cost  of  Complex  Machine,  83 

Design  of  Cost  Systems,  Complexity 
in  Design,  Simplicity 
in   Operation,    118,   193 

,  Illustration    of    Sacrifice 

of  Simplicity  to  Ob- 
tain More  Important 
Benefits,  92 

r-.  — ,  Importance  of  Diagrams 

in      Connection      with 

,    ,  Introduction     of     Im- 

proved Methods,  5,  19 

,  Losses  Due  to  Improp- 
erly Designed  Routine 
Methods,  124 

• ,  Not  Possible  to  Design 

Extremely  Simple  Sys- 
tems to  Meet  Highly 
Complex  Situations,  4, 
60,  118,  192 

,  Procedure    in    Planning 

Routine  Work,   78 

• ,  Special         Qualifications 

Required  to  Design 
Satisfactory  Systems 
of     Cost     Accounting, 

5.  79 
Diagrams.    Sec  Design  of  Cost  Sys- 
tems 

Edison,  Thos.  A.,  74 

Elasticity  In  Cost  Accounting.  See 
Flexibility  in  Cost  Accounting 

Emerson,  Harrington,  3,  180,  181, 
203,  221,  222,  222, 

—  Ralph  Waldo,  6,  76,  82,  185, 
191 

Engineering  Profession  and  Cost  Ac- 
counting, 3,  4,  34 

Exceptions,  Principle  of,  as  Applied 
to  Reports  for  Executives,  29 

Executives,  Reports  for.  See  Re- 
ports for  Executives. 

Expense  of  Operation  of  Cost  Sys- 
tem, 17,  18,  30 

Experimental  Method,   134 

Ferguson,  William,  B.M.,  8,  40 
Fixed   Charges.     See   Cost   of   Idle- 
ness. 


Flexibility   in    Cost   Accounting,   28, 

103,  225 
Focus  in  Cost  Accounting,  29,  44,  81, 

125 
Forecasts,  133 
Formulas,     Cost,     196-201,     205-211, 

213-220 
Frank,  Glenn,  228 
Franklin,  Benjamin  A.,  35,  43 

Galileo,  53 

Gantt,  H.  L.,  35,  39,  40,  45,  54,   178, 

180,  185,  191,  221 
Gates,  William,  52 
Graphic  Methods,  120,  122 

Hauser,  Henri,  183 

Harris,  Prof.  David  Eraser,  jT),  74 

Historical     Cost     Accounting.       See 

Criticisms  of  Accepted  Methods  of 

Cost  Accounting. 

Idleness,  Cost  of,  9,  63-65,  98,  183-185 
Inefficiency,    Manufacturing,    45,    53, 

54 
Inventories,  Valuation  of,  22,,  63 
"Industrial  Democrac},"  48,  50 
Inelasticity      of      Cost      Accounting 

Methods.     See  Flexibility  in   Cost 

Accounting. 

Kipling,  Rudyard,  69 
Knoeppel,  C.  E.,  71 

Labor,  Non-Productive,  Fallacy  of 
Regarding  Low  Percentage  as 
Mark  of   Efficiency,  26 

—  and  Cost  Accounting,  44,  51 

—  Cost  Variations,  9,  58 

—  Costs,   Distribution   of,    189 

—  Standard  Costs,  88 
Lane,  Former  Secretary,   184 
Leitch,  John,  45,  48 

List  Less  Discount  Plan  of  Figuring 

Cost  of  Sales,  160 
Lorimer,  George  Horace,   14 
Loss  through  Inefficient  Methods  of 

Cost  Accounting,  i 

Machine  Efficiencies,  Example  of 
Daily  Report  for  Executives,  12 


233 


Machine  Rates,  UndertjMng  Princi- 
ples of,  loi 

,  Combining      Standard      Labor 

with  Machine   Rate,   107-109 

"Man  to  Man,"  45 

Manufacturing  Efficiency  Data,  9,  24, 

55 
Material   Cost  Variations,    10,  56-58, 

93 
— ,  Standard  Costs  of,  84-87 
Mechanical  Accounting,  103,  104,  105, 
148-150 

Open-Hearth  Costs,  184 

Operation  Division,  Functions  in 
Connection  with  Cost  Sys- 
tem, 36 

,  Requirements   of,   not   Met  by 

Average  Cost  System,  100 

— ,  Problems  of,  132,  135 

Order  System,  Diagram  Illustrating 
Operations  Involved  (Fig.  4),  T] 

Organization,  Problems  of,  68,  70 

Payrolls,  Illustration  of  Daily  Re- 
port, 12 

Percy,  George,  no 

Perkins,   George  W.,  46 

Piece  Work,  Fallacy  of  Regarding 
High  Percentage  as  Mark  of  Effi- 
ciency, 26 

Planning  Board,  Description  of  Ma- 
chine-Group Planning  and  Control 
Board,  126-129 

Polakov,  Walter  H.,  63,  222 

"Post-Mortem"  Cost  Accounting,  180 

Power  Cost  Variations,  10 

Predetermination   of    Costs,   7,   8,   40 

Profits.  See  Profits,  Prede- 
termination of. 

Price  Lists  Used  in  Figuring  Costs 
of  Sales,  160,  161 

Professional  Accountants  and  Cost 
Accounting,  2,  3 

Profits,  Predetermination  of,  16,  67, 
136 

Profit  Sharing,  Views  of  Late  Geo. 
W.   Perkins,  46 

,  Criticisms     of     Profit-Sharing 

Plans  Considered  as  Spur  to 
Efficienc}',  27,  47 


Profit    Sharing;,    Industrial    Democ- 
racy Plan  of  John  Leitch,  48 

,  Suggestions       for       Equitable 

Profit-Sharing  Plan,  51 
Promptness    in    Furnishing   Cost   In- 
formation, 20,  28 
Punched     Card     Accounting.       See 
Mechanical  Accounting. 

Records,  Relation  to  Standards,  39 

Redfield,  William  C,  53 

Reports  for  Executives,  Daily  Re- 
ports, Illustrations  of.   12 

,  General  Principles  in  Con- 
nection with,  13,  14 

,  Summarized  Manufactur- 
ing Statement,   15 

,  Reports    Should    be    Based 

on  Principles  of  excep- 
tions, 29 

Requirements  of  Cost  System,  Accu- 
rate Costs  of  Specific 
Articles,  7 

,  Economical      Operation, 

17 

(Manufacturing  Efficiency 

Data,  9 

,  Promptness  in  Furnish- 
ing  Information,    11 

,  Reports   for   Executives, 

13 

,  Sales  Statistics,  16 

,  Standard     Practice     In- 
structions, 19 
Retrospective  Cost  Accounting.     See 

Criticisms  of  Accepted  Methods  of 

Cost  Accounting. 
Revised  Standards,  206,  211 

Sales,  Cost  of.    Sec  Cost  of  Sales. 

—  Statistics,   16,  30,   145,   148 
Scientific   Management,   34,    130,    131, 

179,  204 

—  Method,  52,  178 

Selling  and   Distribution   Costs,   152, 

174 
Spencer,  Herbert,  178,  179 
Spoilt  Work,   11 
Standard     Costs,     the     Fundamental 

Improvement,  43 
,  Uses   of,  44 


234 


Standard  Costs,  Illustration  of  Sim- 
ple System  of,  55-67 

,  Use   of   Assays   in    Connection 

with,  89 

,  Method  of  Figuring  for  Com- 
plex Articles,  90 

—  Burden  Costs,  88 

—  Labor  Costs,  88 

—  Material  Costs,  84-87 

—  Practice  Instructions,  19,  32 

—  Scrap  Costs,  95 
Standards,  33,  34,  39,  212 

— ■  and  Records,  Relation  of,  39 
Steel  Costs.     See  Open-Hearth. 
Stores  Systems,  18,  78 
Summarized      Manufacturing      Effi- 
ciency Statement,  14,  81,  106 
System,  70,  72,  73 

— ,  Cost,   Basic  Principles  of   Simple 
Cost  System,  80 


Taylor,  Frederick  W.,  2,  33,  45,  130, 

203 
Thomson,  J.  Arthur,   178,  203,  204 
Thompson,  C.  Bertrand,  131 
Timekeeping,    Unnecessary    Expense 
Involved  in  Detailed  Timekeep- 
ing Systems,  18,  31,  81 
— ,  Use  and  Abuse  of  Time  Clocks, 

187 
Tool  Cost  Variations,   ID 

Vanderlip,   Frank  A.,  46 

War  Contracts,  41 
Weighing,   Unnecessary   Expense   of 
Needless  Weighing  Operations,  18, 

93 
Wells,  H.  G.,  71 
Whitehead,  A.  N.,  20 


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